Costain Limited v Tarmac Holdings Limited
 EWHC 319 (TCC)
Katherine Del Mar of 4 New Square
Costain Limited v Tarmac Holdings Limited is an important decision in which Mr Justice Coulson granted Tarmac’s application to stay the proceedings pursuant to s.9(1) of the Arbitration Act 1996, and in so doing, provided guidance on the nature and scope on parties to the NEC3 suite of contracts to act in a spirit of mutual trust and cooperation. The decision also addresses the interplay between two sets of dispute resolution provisions in a contract, and the merits of a raft of challenges to the arbitration agreement on the basis that it was “null and void [or] inoperative” for the purposes of s.9(4) of the Arbitration Act 1996.
David Turner QC and Clare Dixon of 4 New Square acted for Tarmac on the instructions of Derek Adamson of DWF. Costain was represented by Sean Wilken QC and Adam Robb of 39 Essex Chambers.
Pursuant to a sub-contract agreement, Costain engaged Tarmac to supply concrete for work to be carried out on the M1 motorway. It was common ground that the concrete was defective. The parties disagreed as to the scope of appropriate remedial work.
The sub-contract included the NEC3 Framework Contract (2005), as amended by the Framework Contract “Z” clauses, and the NEC3 Supply Short Contract terms and conditions. The sub-contract incorporated two separate clauses dealing with the topic of dispute resolution: (1) a dispute resolution provision permitting adjudication “at any time” (a reference to the jurisdiction of the courts of England and Wales); and (2) a dispute resolution provision containing a restricted right to adjudicate, and if one party was dissatisfied with the adjudicator’s decision, a right to arbitrate (clause 93.3 of the NEC3 Supply Short Contract).
Clause 93.3(1) of the NEC3 Supply Short Contract conditions required a Party wishing to refer a dispute to the adjudicator to do so by notifying the other Party of the dispute within four weeks of becoming aware of it, and by referring the dispute to the adjudicator between two and four weeks following that notification. The same clause further provided “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 “tribunal” was arbitration.
The NEC3 Supply Short Contract conditions also included a mutual trust provision at clause 10, which provided: “The Purchaser [Costain] and the Supplier [Tarmac] shall act as stated in this contract and in the spirit of mutual trust and cooperation…”
Following notification by engineers of a defect in the concrete supplied by Tarmac, the parties engaged in discussion as to the scope and scale of any remedial works. On 27 April 2015, Costain instructed solicitors. Following an exchange of correspondence, Costain’s solicitors wrote to Tarmac’s solicitors “in accordance with the Pre-Action Protocol for Construction and Engineering Disputes” (a reference to the now superseded TCC PAP). On 19 October 2015, Tarmac’s solicitors replied stating that Tarmac was willing to bear the reasonable costs of implementing its proposed remedial works but no more, and requested further information and documents.
Following further exchanges between the parties, on 13 November 2015 Costain’s solicitors wrote to propose a without prejudice meeting, and asked: “… do you agree to refer the dispute to the Technology and Construction Court notwithstanding that the Supply Contract calls for disputes to be resolved by arbitration or adjudication?” Under cross-examination, Costain’s solicitor accepted that this was a reference to clause 93 of the Supply Contract conditions. On 26 November 2015, Tarmac’s solicitors wrote to Costain’s solicitors and stated that the dispute between the parties had crystallised more than four weeks ago, and that, pursuant to clause 93.3, the claim was now out of time.
Thereafter Costain disputed the applicability of Clause 93 and Tarmac’s entitlement to rely on the time bar. In the light of this, in late December 2015, Tarmac’s solicitors referred the time bar dispute to adjudication. The adjudicator’s decision was dated 5 February 2016. He decided that clause 93 applied, that the dispute as to the scope of remedial works arose on 19 October 2015, and therefore required notification by either party to the other party by 16 November 2015, and had to be referred to the adjudicator by 14 December 2015. As this had not happened, he concluded that Costain’s claim could no longer be pursued against Tarmac. Costain subsequently issued proceedings in the TCC.
Existence of an arbitration agreement under section 9(1) of the Arbitration Act 1996
Tarmac bore the burden of proving that there was an arbitration agreement pursuant to s.9(1) of the Arbitration Act 1996. This gave rise to arguments of contractual construction concerning the interplay of the two dispute resolution provisions in the sub-contract. In this respect, Mr Justice Coulson noted that it was not uncommon for there to be two contractual terms in a contract dealing with dispute resolution, and referred to the decisions of the Court of Appeal in RWE Npower Renewables Limited v J N Bentley Limited  EWCA Civ. 150, and Trust Risk Group SpA v Amtrust Europe Limited  EWCA Civ. 437 (“Trust Risk Group”).
Tarmac argued that the two dispute resolution provisions in the sub-contract related to two separate aspects of the relationship between the parties, and it was only the dispute resolution provision in clause 93 which governed a dispute about the supply of concrete, and thus the dispute before the Court. By contrast, Costain argued that because of the mutual trust provision in clause 10.1, it was envisaged that when a dispute arose, the parties would liaise between themselves and agree which of the possible dispute resolution routes should be adopted for that particular dispute.
The judge reached the “firm conclusion” that Tarmac’s interpretation of the sub-contract was the correct one, and rejected Costain’s construction as “impractical, uncertain and commercially unworkable”. He reasoned that the parties had expressly agreed to incorporate two separate sets of contract terms and conditions. This deliberate decision reflected the two elements of the relationship between the parties. He noted that this conclusion was not only in accordance with the language the parties used, but also in accordance with commercial common sense.
He further noted that dispute resolution provisions require certainty. Costain’s construction of the dispute resolution provisions would not lead to any certainty; everything would depend on the attitudes the parties adopted, once the dispute had arisen. Consequently, he concluded that the sub-contract agreement between the parties dealing with the supply of concrete contained an arbitration clause at clause 93, whereby a claim would first be subject to adjudication and thereafter – if necessary – arbitration. He further went on to hold that Costain’s claim within the litigation was a matter which clause 93 required to be referred to arbitration.
Challenges to the arbitration agreement under section 9(4) of the Arbitration Act 1996
Costain deployed a number of arguments to contend that the arbitration agreement was “inoperative” for the purposes of s.9(4) of the Arbitration Act 1996, including abandonment, repudiation and that the adjudicator’s decision was a nullity. Of particular interest was the argument based on estoppel: Costain argued that Tarmac had a duty to speak out, rather than stay silent, on clause 93.
Mr Justice Coulson held that no estoppel case could be established on the facts before him. In this respect, he found inter alia that:
- Costain’s solicitors were aware of the time bar in clause 93.3 in April or May 2015, within a matter of weeks of being instructed. However, because Costain’s solicitors understood (wrongly) that there was a right to adjudicate at any time, no particular attention was paid to clause 93.3.
- Costain’s solicitors were aware that clause 93.3 provided for adjudication and then arbitration, as evidenced in Costain’s solicitors’ letter of 13 November 2015.
The judge concluded that there was no representation, or any common understanding, that the parties would not arbitrate, much less that Tarmac would not rely on its rights in relation to the time bar in clause 93.3. He further found there had been no “sharp practice” on the part of Tarmac; he held that on any view of Tarmac’s conduct, Tarmac had done nothing “wrong” which could now be regarded as underhand or unfair. This distinguished the facts before the Court from the cases of Pacol Ltd v Trade Lines Ltd (‘The Henrik Sif’)  1 Lloyd’s LR 456 and The Stolt Loyalty  2 Lloyd’s Rep 281. He rejected the suggestion made in oral submissions that Tarmac’s solicitors had a duty to explain to Costain’s solicitors how clause 93 worked, and the need to refer a claim promptly.
Finally, Mr Justice Coulson noted that for the estoppel argument to work, Costain (the representee) had to show that it knew that Tarmac (the representor) had some right that it was giving up: HIH Casualty & General ins Ltd v AXA Corporate Solutions  Lloyds LR 1. However, on the facts before the Court, it was apparent that Costain’s solicitor did not understand that clause 93 might bar the claim. Therefore, Costain’s solicitor could not have accepted the withdrawal or abandonment of that right, either by way of a representation or by way of a common assumption. In any event, Costain had suffered no detriment as a result of any representation or common assumption, since the letter of 13 November 2015 showed that Costain was alive to the applicability of clause 93 prior to the date on which its right to adjudicate became time-barred.
Mr Justice Coulson then considered whether his analysis of Costain’s estoppel argument was affected in any way by the mutual trust provision in clause 10 of the NEC3 Supply Short Contract. He held that Tarmac had not said or done anything which “crossed the line”. This forced Costain to argue that as a result of the mutual trust provision, Tarmac had an express obligation to point out to Costain the nature, scope and potential effect of clause 93. This argument was rejected.
Relying on Keating on NEC3 (First Edition 2012), and a line of Australian cases, the judge held, at paragraph 124, that the mutual trust and cooperation obligation
“…would go further than the negative obligation not to do or say anything that might mislead; it would extend to a positive obligation on the part of the defendant to correct a false assumption obviously being made by the claimant, either that clause 93 was not going to be operated or that the time bar provision was not going to be relied on. But beyond that, … there can have been no further obligation, because otherwise the provision would have required the defendant to put aside its own self-interest.”
It followed that the Tarmac had not done or said anything about clause 93 which was or could have been misleading.
The argument based on repudiation was rejected for reasons which overlapped with those applicable to the case on estoppel. The judge held that abandonment would have required an express or implied agreement between the parties, but none arose on the facts. He went on to reject an argument that the adjudicator had acted without jurisdiction with the effect that the arbitration clause was void, both finding that the adjudicator had been validly appointed and acted within his jurisdiction and also observing that even if the adjudicator had acted without jurisdiction then the arbitration clause would still have applied.
Costain Limited v Tarmac Holdings Limited provides useful guidance on the nature and scope of the duty on parties to the NEC 3 suite of contracts to act in a spirit of mutual trust and co-operation. The case also raises interesting points of construction concerning the interplay of separate dispute resolution provisions in a single contract, and contains what is likely to prove a useful analysis of the different routes by which an arbitration clause might be held null and void, inoperative or incapable of being performed.
To read the full judgment, click here.