CWS v BIRSE CONSTRUCTION LIMITED (1997) CA July

Many standard forms name an Engineer or Architect to act under the main contract. He decides both technical and contractual matters. Importantly, he can define the obligations and liabilities between the parties. The arrangement has the benefit of creating certainty in a complex process, but allows the necessary flexibility. It is commonly passed into subcontracts, so that the Architects certificates and decisions under the main contract are binding and definitive under the subcontract.

The scheme extends to arbitration. Arbitration clauses normally give the Arbitrator power to open up, review and revise the decisions and certificates of the Architect. In Northern RHA v Crouch Construction Limited (1984) it was held that the standard JCT arbitration clause enabled the arbitrator to vary Architect's certificates, opinions and decisions. It follows that the arbitration award can create new rights, obligations and liabilities in the parties. This is a necessary safeguard for what is after all a wide power given to the Architect by the parties. The question arises - what is the status of an award in the main contract arbitration? Does it affect the rights and obligations of the parties under the subcontract? This was the issue in the present case.

Birse was the main contractor for a shopping centre at Dalston. The contract was the 1963 edition of JCT Standard Form. CWS was the nominated mechanical and electrical subcontractor under the "Green Form".

Disputes arose under the main contract with the Employer which was College Estates Limited. In the subsequent arbitration the arbitrator found that the causes of delay and disruption were the responsibility neither of the contractor nor of the subcontractor. He awarded sums amounting to nearly £5m to the contractor. Of this, £1m was for claims which mirrored claims made by the subcontractor in the subcontract arbitration. This was a separate but pending arbitration with the contractor. Unfortunately the Employer went into liquidation without honouring the award. The contractor was therefore left with an awkward situation. He had helped the subcontractor in deciding issues under the main contract, but now found that he might himself be liable for the £1m awarded. The situation was therefore a common one when liquidation occurs. Who effectively was to carry the loss? Was it to be the contractor? On the other hand, did the contractual scheme protect the contractor from the Employer's insolvency in relation to subcontract issues?

A feature of the JCT contractual scheme of nomination is the Architect's certificate for payment. If it states that payment is due for subcontract works then it triggers all payment mechanisms. It triggers not only the contractor's right to payment from the Employer, but also the subcontractor's right to payment by the contractor, less 2.5%.

Another feature of the scheme is the flexibility of the arbitration provisions. The subcontractor has the benefit of name borrowing arbitration provisions for specific matters. This allows the subcontractor to pursue matters in the main contract arbitration under the name of the main contractor. In addition under clause 12 the contractor can be obliged to pursue an arbitration for the benefit of the subcontractor. The subcontractor then obtains any rights or benefits of the main contract as far as they apply to the subcontract works.

This happened in the present case. Faced with the potential loss due to the Employer's insolvency, the contractor understandably argued that he had no obligation to account for payments due. The obligation he said arose only when the Employer had paid him. He argued that since it had proved impossible to enforce the award, nothing was due to the subcontractor. The status of the award was therefore the crucial issue.

In this case the claim was for loss and expense caused by delay and disruption not the fault of the contractor or subcontractor. Under the contractual scheme, the Architect ascertains the loss and expense due to variations or disturbances of the progress of the works. He then issues the appropriate certificate. The issue of the certificate, whether final or interim, is a condition precedent to the right to payment. It was held that in arbitration, where the contractor alleges that the Architect has not performed these obligations, then this is a claim for the Architect's failure to ascertain and failure to certify.

It was also held in the instant case that under the JCT arbitration provisions, the arbitrator's award replaces the Architect's certificate as the contractor's right to payment. In awarding £1m in respect of the subcontract works, the Arbitrator was reviewing the certificates issued and the decisions made by the Architect. He awarded the sums which should have been the subject of certificates. The main contract expressly provided for the arbitrator's award to over-ride the decisions or certificates of the Architect, but the subcontract contained no such provision. The Court of Appeal therefore examined the whole contractual scheme to establish the effect of the main contract arbitration award in the subcontract.

It was held that Clause 12 of the sub contract operated to ensure that certification of the subcontract works operated to the benefit of the subcontractor. The benefit was obtained either when the Architect issued the certificate or when the arbitrator made his award. The arbitrator's decision directly affected the subcontractor's rights. The Court of Appeal considered it absurd for the subcontractor to borrow the contractor's name to challenge the amount certified or failure to certify, if it were otherwise. Further, the subcontract did not make payment conditional on the Employer paying the contractor. The contractor therefore had to account to the subcontractor for the £1m awarded in relation to the subcontract works.