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TCC rejects allegations that arbitrator erred in law

We don’t see many construction arbitration cases come to appeal in the TCC. Therefore, Carr J’s judgment in John Sisk & Son Ltd v Carmel Building Services Ltd is a useful reminder that one of the advantages of arbitration is that, unless the parties have agreed otherwise, they can appeal points of law under section 69 of the Arbitration Act 1996. This is obviously unlike adjudication, although I’m sure some adjudication users would also like the right to be able to appeal points of law!

John Sisk & Son Ltd v Carmel Building Services Ltd

John Sisk was engaged by Bolsover Street Ltd to construct a mixed use building in Bolsover Street, London. In turn, Carmel was engaged by John Sisk to carry out the mechanical and electrical works. The parties’ sub-contract consisted of a number of documents (including the Sisk conditions) and it incorporated the JCT Conditions of Sub-Contract, 2005 Edition, Revision 1 2007 (SBCSub/C) (the JCT conditions). Disputes were to be referred to arbitration under the Construction Industry Model Arbitration Rules (CIMAR).

Work started in 2008. In June 2009, Carmel submitted its eighth interim application for payment (IA 8). John Sisk valued the work at £2.688 million (gross) and the final date for payment was 3 July 2009. However, on 19 June 2009, Carmel entered into administration and it ceased work. John Sisk terminated the sub-contract, as it was entitled to do under clause 7.5.1 of the JCT conditions.

Fast-forward to 2013. In April, Carmel served its notice of arbitration and in September, the arbitrator was appointed. In the arbitration:

  • Carmel claimed it was entitled to £1.975 million under clause 7.7.4 of the JCT conditions, whereas John Sisk argued it was entitled to nothing. Carmel also raised a counterclaim for direct loss and/or damage as a result of the termination.
  • John Sisk claimed sums due to it by way of set-off under clause 7.7.4 of the JCT conditions. Its primary claim was for £1.344 million, being the whole of the losses it had incurred following termination. Alternatively, its secondary claim was worth £1.145 million (being the itemised costs caused by the termination).

Following an extended period while the parties exchanged pleadings, evidence (both factual and expert) and held a seven-day hearing, the arbitrator’s award was issued on 20 November 2015. The arbitrator decided that Carmel was entitled to £1.042 million plus £360,000 in interest.

Section 69, Arbitration Act 1996

Section 69(1) provides that:

“…a party to arbitral proceedings may… appeal to the court on a question of law arising out of an award made in the proceedings.”

Sections 69(2) to 69(5) deal with the application for leave to appeal. Section 69(7) provides that on appeal, a court can confirm, vary or set aside an award, or it can remit part or all of the award back to the arbitrator.

Section 69 application

John Sisk’s section 69 application focused on three issues where it said the arbitrator had made an error of law:

  • The burden of proof in relation to Carmel’s claim under clause 7.7.4 of the JCT conditions.
  • Whether John Sisk’s claim to a set-off under clause 7.7.4 of the JCT conditions was a global claim and so was irrecoverable.
  • The interest rate to be applied to sums awarded to Carmel.

Carr J produced a comprehensive judgment in her customary, detailed style. She addressed each issue in turn and dismissed them one by one. I do not really want to mention the first issue, as it is fact specific. Instead, I will focus on the second and third issues.

Was the set-off claim a global claim?

In the arbitration, Carmel had argued that John Sisk’s primary claim was a global claim and was irrecoverable. It relied on Akenhead J’s judgment in Walter Lilly v MackayThe arbitrator also rejected the primary claim finding that, on the facts, John Sisk had failed to prove it.

On appeal, John Sisk said the arbitrator was wrong, that he “went up a blind alley” in two ways. He appeared to think (incorrectly) that:

  • Global and total costs claims were different things, and that the primary claim was a total costs claim, not a global claim.
  • The burden of proof for a total costs claim was greater.

On reading the extracts from the arbitrator’s award, at first blush, it does appear that he got in a bit of a muddle as to the distinction between global and total cost claims (see in particular, paragraph N65). To clarify, a total cost claim is simply one type of global claim where a single sum is claimed that is the difference between the total cost and the contract price. However, it may well be that there was no error here because the arbitrator had said that he termed Sisk’s primary claim its “total costs claim”, compared to its secondary “itemised claim”. With hindsight, it might have been better to have stuck with the party’s choice of language of “primary claim” and “secondary claim”. It certainly would have been less confusing.

I also found it slightly odd that the arbitrator agreed with John Sisk that its primary claim was not a global claim, but then went on to address the more onerous burden a party has to prove a global claim. This was unnecessary as the arbitrator went on to dismiss Sisk’s primary claim due to the accuracy of its costs.

Finally, it was good to see Carr J reiterating (in paragraphs 55 and 57) that there are added evidential difficulties in proving a global claim. As I said at the time of Walter Lilly:

“Akenhead J stressed that a contractor still has to prove its claim as a matter of fact and, in particular, it must demonstrate three things on a balance of probabilities:

  • Events occurred that entitle the contractor to loss and expense.
  • Those events caused the contractor delay and/or disruption.
  • Such delay or disruption caused the contractor to incur loss and/or expense.

This could still be a difficult task when there is a lack of direct causal links.”

Which rate of interest applied?

Clause 15.9 of the Sisk conditions amended clause 4.10.5 of the JCT conditions (which dealt with interest on interim payments). The amendment provided that John Sisk:

“…may (but shall not be obliged to) pay interest… from the final date for payment until payment of such sum is made.”

The arbitrator found this clause was void under section 8(4) of the Late Payment of Commercial Debts (Interest) Act 1998 (Late Payments Act 1998). This meant the parties’ contract did not provide a substantial remedy for late payment and the sub-contractor was entitled to interest at the statutory rate of 8% over base rate.

Carr J said the arbitrator’s reasoning on interest was difficult to follow. She noted that Carmel had not tried to support it in the appeal hearing (Carmel had suggested it was “an odd way of looking at it”), but that it did agree that the arbitrator had reached the right result.

Carr J also noted there was a “short answer to the conundrum”. The arbitrator could have addressed this point swiftly because the interest clauses of the JCT conditions did not apply to payments under clause 7.7.4, meaning that the Late Payment Act 1998 provisions were implied.

Don’t forget to provide for interest on late payments

It is always good to be reminded that parties need to deal adequately with matters in their contract, and that includes interest. Surely it must never be a good idea to leave interest to be calculated under the provisions of the Late Payment Act 1998? The payee will get interest at 8% over base rate and, as a result of the changes resulting from the Late Payment of Commercial Debts Regulations 2013 (SI 2013/395), it may (and I stress may) be possible to recover the reasonable costs of recovering the debt.

In my view, there is no point in omitting interest provisions altogether in the hope that a party will somehow forget to claim interest. This will simply not happen, especially if a party is professionally advised (which is almost always the case these days). The same applies if the parties include an unreasonably low interest rate. In Yuanda (UK) Co Ltd v WW Gear Construction Ltd, Edwards-Stuart J held that 0.5% above base rate was not a substantial remedy. He also remarked that the 5% over base rate included in the JCT standard forms of contract was a substantial remedy.

So, there you have it. By providing a remedy of, say, 5% above base, these problems can be avoided.

MCMS Ltd Jonathan Cope

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