IN THE HIGH COURT OF JUSTICE

QUEEN’S BENCH DIVISION

TECHNOLOGY AND CONSTRUCTION COURT

HIS HONOUR JUDGE HUMPHREY LLOYD QC

BETWEEN:

YORKSHIRE WATER SERVICES LIMITED

Claimant/Part 20 Defendant (1)

and

TAYLOR WOODROW CONSTRUCTION NORTHERN LIMITED

Defendant/Part 20 Claimant (1) and (2)

and

BIWATER TREATMENT LIMITED

Part 20 Defendant (2)/Part 20 Claimant (3)

and

ELGA LIMITED

Part 20 Defendant (3)

Case Number HT 01 289

Dates of Judgments 3 and 18 October 2002

[2002] EWHC 2140 TCC

JUDGMENT

Pursuant to the Practice Statement of 22 April 1998 this is the official judgment of the court and no note or further record is to be made.

His Honour Judge Humphrey LLoyd QC

18 October 2002

Timothy Elliott QC appeared for the Part 20 Defendant (3) (Elga), instructed by Shadbolt & Co.

David Streatfeild-James QC and Fiona Parkin appeared for the Part 20 Claimant (3) (Biwater), instructed by Masons.

JUDGMENT (No 1)

3 October 2002

1. I deal first with an initial issue: is Part 11 the appropriate provision of the Civil Procedure Rules? The applicant, Elga, is the defendant to a Part 20 claim brought against by Biwater which itself a Part 20 defendant to a claim by Taylor Woodrow which has been sued in the main action by the employer, Yorkshire Water. Biwater is thus a sub-contractor and Elga a sub-sub contractor.

2. Elga seeks an order that the court has no jurisdiction to try the claims advanced by Biwater against it, as set out in the Part 20 claim; alternatively that it should not exercise that jurisdiction on the grounds, as set out in its application form. First, the immediate Part 20 claimant, Biwater, has no cause of action against Elga and there is no issue over which the court could have jurisdiction. Elga then refers to the main action and says that Yorkshire Water had no cause of action against Taylor Woodrow and has no cause of action today. Accordingly, there is no basis for Taylor Woodrow to claim from Biwater in respect of any liability to Yorkshire Water and likewise Biwater has no basis for claiming in respect of the same from Elga. The second ground is that, in any event, none of the claims advanced by Biwater against Elga has been (a) submitted by Biwater to Elga prior to 20 December 2001; (b) referred for resolution by negotiation as is mandatory in respect of all such claims as a result of clause 3 of the said contract between Biwater and Elga; or (c) referred to decision by adjudication in the event of failure to resolve by negotiation as is also mandatory as a result of clause 3. The third ground is, in so far as Biwater seeks to recover from Elga a sum by way of financial reimbursement equivalent to whatever sum might be due from Taylor Woodrow to Yorkshire Water pursuant to clause 36.7 of the main contract, any dispute as to the quantum of such claim is a matter exclusively for decision by expert determination and not by the court.

3. The action commenced by Yorkshire Water against Taylor Woodrow relates to the Knopstrop sewage treatment works. Yorkshire Water says that it has defects and does not do that which the contract promised. Yorkshire Water has undertaken some remedial work and has incurred a lot of costs. It is in the course of undertaking further remedial work and is incurring many more costs. The contract between Yorkshire Water and Taylor Woodrow contains, amongst other things, the standard form of contract published by the Institution of Chemical Engineers. That includes clause 44.2 which says that:

“... the liability of the Contractor to the Purchaser for any breach of contract shall be limited to the expenses, charges, damages and reimbursements expressly provided in the Contract .”

Accordingly, in the eyes of the defendants and it seemed also probably in the eyes of Yorkshire Water (at least for the time being), many of the issues of law which arise out of the claim will be concerned with whether or not Yorkshire Water’s claims are those expressly provided in the contract or are otherwise permissible. That is in part the justification for ground 1 in the application, but, as I indicated, I shall not deal with ground 1, since it is accepted and, in any event it is my view, that ground 1 should be considered on another occasion. I shall deal with grounds 2 and 3 later.

4. Taylor Woodrow subcontracted part of the work to Biwater and Biwater subcontracted controls and other parts to Elga. There are therefore typical relationships and these are typical proceedings. The claim by Yorkshire Water against Taylor Woodrow has been passed on by Taylor Woodrow to Biwater in the Part 20 proceedings and so by Biwater to Elga in these Part 20 proceedings. Biwater rely on a clause in Elga’s sub-contract which, if Elga is in breach of contract, provides an indemnity against Biwater’s potential liability to Taylor Woodrow, as well as making Elga liable for Biwater’s own costs. A great deal of effort has already been made to try and avoid the case coming to trial. As set out in the evidence, there have been attempts to obtain a resolution of all or part of the dispute by negotiation, mediation and possibly other forms. There has been a stay of the proceedings to enable the resolution of the dispute to be explored.

5. The costs have mounted. The trial is fixed for April next year. Elga, which was brought in relatively late, made it clear at a case management conference in June that it considered that the proceedings brought not only by Yorkshire Water but in turn derivatively by Biwater against it, were misconceived and untenable, for a number of reasons then advanced by Mr. Elliott in a carefully prepared skeleton argument, and that it intended to take such steps as were open to it in order to get out of this litigation altogether, a position which, on further consideration, may have been modified to the extent of accepting that it may not be possible to get out forever but merely for the present.

6. It was left at the case management conference that Elga would consider its position and decide what it was going to do. The order then made included certain provisions. First, as a preliminary, the case management conference was adjourned until 18 October, amongst other things, to consider preliminary issues suggested by Elga. Secondly, and relevantly for today’s purposes, there was a provision that Elga was to issue and serve any application in relation to jurisdiction by 25 June and, then, by 29 August to notify all parties and the court whether it was intended to pursue that application and, if so, in relation to which parts of Biwater’s claims. If that application was to be heard then it would be heard as it has now been heard before me yesterday and today. Elga did in fact so notify the parties and did make the application to which I have referred. It has framed its application under Part 11 of the Civil Procedure Rules. That says:

“(1) A defendant who wishes to—

(a) dispute the court’s jurisdiction to try the claim; or

(b) argue that the court should not exercise its jurisdiction,

may apply to the court for an order declaring that it has no such jurisdiction or should not exercise any jurisdiction which it may have.”

As that intention had been signalled, the order was made with such a step in mind.

7. Such an application is, on the face of it, a little unusual where a party in the position of Elga simply wishes to say that the claims against it are misconceived or that there is no cause of action against it. However, it maintains that it is open to a defendant in such a position to utilise Part 11 where there is effectively no cause of action. Without anticipating too much the detailed and measured arguments of Mr. Timothy Elliott QC for Elga, they are, in essence, that if the claim is bound to fail then it cannot be tried in any real sense and the court has therefore no jurisdiction to try it.

8. The defendant has chosen the mechanism under Part 11 partly, it seems, as a result of what I said in Bernhards Rugby Landscapes v. Stockley Park Consortium when I heard and decided certain issues, in part on 7 February 1997 (82 BLR 39) and, in part, later, on 22 April 1998. On each occasion there were many issues to be resolved and, just as here, the arguments ranged quite widely. One of them on the second occasion related to whether Order 12, rule 8 of the Rules of the Supreme Court was appropriate where a party maintained that the contractual dispute resolution mechanism had not yet been implemented or exhausted and accordingly the commencement of an action prior to that time was wrong whereby the claim was not justiciable. The wording of the Rules of the Supreme Court referred to the fact that objection could be taken to the jurisdiction on grounds of irregularity (as set out in Order 12 rule 7) and “on any other ground”. It provided that the court might make a declaration that in the circumstances of the case the court had no jurisdiction over the defendant in respect of the subject matter of the claim or the relief or remedy sought in the action. I took the view, on the arguments presented to me on that occasion, that Order 12 rule 8 was clear and wide, that there were apparently no authorities on it and that it was open to a defendant to use and, indeed, that it ought to use that provision when it wished to say that the contractual mechanism was such that a claim was not maintainable.

9. In the case of Halifax Financial Services v. Intuitive Systems Ltd. [1999] 1 All ER (Comm) 303 the same approach was adopted. I am told by Mr. Streatfeild-James QC (who appeared with Miss Parkin for Biwater) that that course was followed in the light of my earlier judgment. In the course of his judgment McKinnon J. said of my judgment that it supported rather than contradicted the principle that the court retains jurisdiction. He said very shortly, tersely but clearly:

“I regard the application under Order 12 rule 8 effectively as a non-starter.”

In these circumstances I therefore approach Part 11 (which is the successor to Order 12 rule 8) on the basis that one ought to start from basic principles. In addition, Part 11 is not framed in the same language. In part this must be due to the fact that the Civil Procedure Rules now deal with all the civil courts and accordingly it is necessary in dealing with questions of jurisdiction to cover rather more than was the subject matter of Order 12 rules 7 and 8.

10. The primary question therefore is whether Part 11 is available. Mr. Elliott for Elga bases his submissions on a reading of the word “jurisdiction”. He looks at Part 11 in its context and in the context of the Civil Procedure Rules as a whole. He also referred to some dicta in Guaranty Trust Company of New York v. Hannay and Company [1915] 2 K.B. 536 at page 567 where Bankes L.J. in considering the meaning of “jurisdiction” when applied to the powers of a court of justice said:

“The term appears to be used in a double sense, sometimes as referring to a case where the matter in dispute is such that it is impossible for any Court, or sometimes for a particular Court, to entertain it; as for instance where a Court is asked to enforce an agreement which is made void by statute, or, as in Barraclough v. Brown [1897] A.C. 615, where exclusive jurisdiction had been given by statute to a Court other than that in which the application was made; and sometimes as referring to a case where the particular Court refused to entertain some matter in dispute on the ground that it was not matter proper or convenient for it to adjudicate upon.”

So Bankes L.J. put the matter quite broadly. It may be noted that in Bernhards Rugby Landscapes v. Stockley Park the application echoed the words of Bankes L.J. because it also sought a declaration that the claim being made was not one which the court could entertain.

11. Elga’s case was that a court looking at Biwater’s claim should say: “This is just not possible to entertain. The agreement is void by statute. Accordingly what is the point in going on? I would have no jurisdiction.” (It is of course assumed that Elga is right in its contention that Biwater has no present cause of action.) Accordingly, Mr. Elliott submits, that is precisely what Part 11 is concerned about. He referred to a series of cases (starting with Siskina v Distos Compania Naviera SA The “Siskina” [1979] AC 210; [1979] 3 W.L.R. 818) in which it has been held that there has been no power, and thus jurisdiction, to issue an injunction unless either a cause of action was established or was threatened. The classic statement of principle was to be found in The Siskina itself ([1979] 3 W.L.R. at page 825) where Lord Diplock said:

“A right to obtain an interlocutory judgment is not a cause of action. It cannot stand on its own. It is dependent upon there being a pre-existing cause of action against the defendant arising out of an invasion, actual or threatened by him, of a legal or equitable right of the plaintiff for the enforcement of which the defendant is amenable to the jurisdiction of the court. The right to obtain an interlocutory injunction is merely ancillary and incidental to the pre-existing cause of action. It is granted to preserve the status quo pending the ascertainment of the court of the rights of the parties and the grant to the plaintiff of the relief to which his cause of action entitles him, which may or may not include a final injunction.”

Those observations were followed in The ‘Veracruz I’ [1992] 1 Lloyd’s Rep. 353 C.A., to which I was referred, and also in The ‘P’ decided shortly thereafter by Evans J. [1992] 1 Lloyd’s Rep. 470. It is not necessary to refer to the judgments in either of those cases.

12. Part 11 has to be read against the background of the whole of the Civil Procedure Rules and in particular Rule 1.1 (the overriding objective): Rule 1.2(b). First, Rule 1.1 (2) says:

“Dealing with a case justly includes, so far as is practicable -- ...

(b) saving expense ...

...

(d) ensuring that it is dealt with expeditiously and fairly ... .”

I fasten on two central provisions and I do not disregard the remainder. So, on the basis of the evidence in support of the application, Mr. Elliott contends that Part 11 may be used to protect Elga from having to incur further expense in defending what it considers to be a claim which is without foundation since it will identify and dispose, expeditiously and fairly, the crucial point that Biwater’s claim is premature. That would mean that the nettle would be grasped at the first possible instance. Thus Part 11 is an appropriate provision because its use is consistent with the overriding objective. There are, of course, as Mr Elliott acknowledges, other ways in which a party in the position of a defendant may attack a case where there is no cause of action. He maintains that the very fact that those other provisions exist, such as those to be found in Rule 3.4 and in Part 24 in the case of summary judgment, do not detract from the force or width of Part 11. They are merely other options available to a defendant which the defendant may deploy at an appropriate moment.

13. Mr. Elliott also referred me to the case of County and District Properties Ltd. v. C. Jenner & Son Ltd. [1976] 2 Lloyd’s Rep. 728 in which Swanwick J. had to consider whether the court had jurisdiction under section 39 of the Supreme Court Act 1925 when a claim was made similar to the claim in this case by a contractor against a sub-contractor on the grounds of a claim being made against a contractor which had not yet been brought to judgment, a claim for an indemnity, whether in those circumstances there was still a cause of action. He said in that case, having referred to earlier authorities:

“These citations, and this argument, satisfy me that it is perfectly competent for a defendant, and the present defendant in particular, to bring third party proceedings in order to enforce a cause of action which will arise only in the event of judgment being given against him. In the present case according to my judgment on the main issue, the cause of action will arise on ascertainment of the liability of the defendants by judgment being given against them, if of course it is. I should add that this procedure is obviously convenient, because it enables all questions as between all parties to be determined by the same judge at the same hearing, once and for all.”

The provisions of section 39 of the 1925 Act have been superseded and restated, it appears, by section 49 of the Supreme Court Act 1981, subsection (2) of which states:

“Every court shall give the same effect as hitherto-- ...

(b) ... subject to the provisions of this or any other Act, shall so exercise its jurisdiction in every cause or matter before it as to secure that, as far as possible, all matters in dispute between the parties are completely and finally determined, and all multiplicity of legal proceedings with respect to any of those matters is avoided.”

It seems to be common ground between the parties that section 49(2) restates the policy of the Supreme Court Act of 1925, itself a consolidating provision which represented established law and practice.

14. Mr. Streatfeild-James maintains that Part 11 is not open to Elga. He says that Part 11 is essentially concerned with matters of what might be called pure jurisdiction, that is to say, whether a party is, to use the terms of Lord Diplock’s judgment, amenable to the jurisdiction; whether the defendant was within the jurisdiction or capable of being brought within the jurisdiction; whether of course indeed the court had its own statutory jurisdiction over the claim in question; but not other questions which are essentially concerned with whether the claim itself is maintainable, i.e. whether there is a cause of action and a good claim in law. Mr. Streatfeild-James maintains that the proper course for a party in the position of the defendant in this case is, if it thinks that the claim against it is in part or in whole misconceived or inappropriate, to use other remedies set out in the Civil Procedure Rules, notably the provisions which entitle a party to strike out or to apply for summary judgment.

15. Amongst other things, he maintains that if one looks at the overriding objective then utilisation of Part 11 would effectively lead to yet more of what is called satellite litigation. The court would be troubled prematurely with a question which really it ought only to consider at the time of the first case management conference or otherwise during the ordinary course of the case. Paragraphs (8) and (9) of Rule 11 make provision for the service of written evidence and the consequences if the defendant were to act. Therefore it envisages that it is possible that a court would have to grapple with the real nature of the claim. Mr. Streatfeild-James also points out that, in relation to arbitration, in Hayter v. Nelson [1990] 2 Lloyd’s Rep. 265 and in Halki Shipping v. Sopex [1998] 2 All E.R. 23 (including the cogently reasoned dissenting judgment of Hirst L.J.) it was not questioned that a court might have jurisdiction over what was in effect really a non-dispute, provided that it was a bona fide notional dispute. Accordingly, the very fact that the claim might not be a true cause of action or might be premature did not mean to say that the court had not got jurisdiction, for example, as in some cases, because of non-compliance with alternative dispute resolution clauses or because a clause of the contract said, as in Scott v. Avery , that no action could be brought until an award had been obtained. It certainly had jurisdiction, according to Mr. Streatfeild-James, to investigate that very question, and the investigation of that question would involve, for the purposes of Part 11, the process of trying the claim. The words “try the claim” in Part 11 meant dealing with the claim, investigating it and indeed, if one considers other provisions of the Civil Procedure Rules and looks at the provisions set out in the case management section (though not expressly referred to I think by Mr. Streatfeild-James), that is the moment at which the court would investigate, identify the issues and effectively begin the process of trying the claim by seeing what it is that ultimately would have to be decided.

16. Paragraphs (3) to (5) of Part 11 also contain the following provisions:

“(3) A defendant who files an acknowledgement of service does not, by doing so, lose any right that he may have to dispute the court’s jurisdiction.”

Paragraph (4) deals with when the application must be made. Paragraph 5 says:

“(5) If the defendant—

(a) files an acknowledgement of service; and

(b) does not make such an application within the period for specified in paragraph (4), he is to be treated as having accepted that the court has jurisdiction to try the claim.”

A similar provision is to be found in paragraph 8. Accordingly, Mr. Streatfeild-James submits that, if the arguments advanced on behalf of Elga were right, it could or would mean that a defendant who did not take steps under Part 11 to obtain a declaration that the court had no jurisdiction, on the grounds that there was no cause of action and the claim was not a justiciable claim, would then lose the right to do so because of the words in sub-paragraph (3) “lose any right that he might have to dispute the court’s jurisdiction”.

17. As this judgment is only concerned with the preliminary part only of Elga’s application I have endeavoured to set out the essential elements of each party’s case but I do not pretend that I have done full justice to the submissions.

18. The issue turns upon the meaning of the words at the opening of Part 11: “the court’s jurisdiction to try the claim”. I do not think that “jurisdiction” can be separated from “to try the claim”. They go together and, as Mr Streatfeild-James correctly submitted, “to try a claim” includes everything once the court has become seized of it and embraces its pre-trial management. Nevertheless what might be meant by “jurisdiction”? Certain conditions must be satisfied before a court has jurisdiction. The Supreme Court Act is concerned with constituting courts which will have jurisdiction over certain matters. The competency of the claimant is also essential. Does the claimant as a corporation actually exist? If the corporation does not exist there can be effectively no jurisdiction over it, a non-existent claimant, despite the fact that somebody has made a claim. Is the claimant as an individual a person with legal capacity to bring a claim of this sort? Is the defendant in existence and a legally recognised entity? The question of whether a defendant resident outside the territorial jurisdiction is nevertheless within the enlarged jurisdiction of the court also has to be considered within Part 11. These are some of the matters which Mr. Streatfeild-James rightly, in my judgment, says that Part 11 is primarily concerned with, i.e. what he described as the pure or territorial jurisdiction.

19. However, jurisdiction, as is clear from legislation and the structure of the courts, goes further than that because certain courts have limited jurisdiction, other courts have unlimited jurisdiction. A defendant might utilise Part 11 if a court could not entertain the claim because it was outside its jurisdiction. For example, if a claim is brought in this court that does not fall within the Part 60 of the Civil Procedure Rules which define the jurisdiction of this court, then the claim has to be heard by the appropriate court. The nature of the claim itself has then to be considered. The procedure available under Part 11 may not merely be about territorial jurisdiction or competency but also with the nature of the claim: What sort of claim is it? Has this court got jurisdiction over it? If therefore a court is to look at the nature of the claim, the sort of claim it is, there does not seem to me to be an insuperable objection that at the same time, within the otherwise clear words of Part 11, the court might be entitled to investigate whether this is a claim which can be entertained at all (using the words of Bankes L.J). If the court, on an objection by the defendant, looked at the claim and concluded that it was impossible to entertain, then, on the face of it, a court would be saying that it did not have jurisdiction to try that claim. Logically this could extend to cases which were have covered in argument as to whether or not there is a present cause of action, such as The “Veracruz” or The “P” . Mr. Streatfeild-James referred to Letang v. Cooper [1965] 1 Q.B. 243: - would a court have to go through the check list of seeing whether there was a factual basis giving rise to a relief or remedy? I leave aside the example considered in Bernhards Rugby v Stockley Park as to whether there was a claim when, although there might be a latent cause of action, nevertheless there was not an immediate right to a relief or remedy since the processes of the contract had not then been exhausted so as to entitle a party to resort to the court or to arbitration.

20. In my judgment if Rule 11 (1) stood alone, and if one discarded the proposition (which I accept) that “to try a claim” (especially under the CPR) includes investigation to determine whether it is justiciable, there would be grounds for saying that it would be open to a defendant to use Part 11 as to do so would be consistent with the principles set out in the overriding objective that a court should have at an early opportunity to hear a properly presented application by the defendant to say, as here, that a claim really was going nowhere except into the ground and therefore should be disposed of there and then. Pragmatically, the court would thus not have “jurisdiction to try a claim” that was not a true claim in law but merely a form of words strung together to present what passed for something that was not in reality a claim at all. However, the opening words of Part 11 do not stand in isolation.

21. First of all, they are subject to and give effect to section 49 of the Supreme Court Act. County and District Properties v. Jenner shows that a court has jurisdiction even though there was not a present cause of action but merely an inchoate cause of action. Accordingly, the jurisdiction of the court to try the claim is, as it were, also emergent. The assistance of the court is being invoked, to quote section 49(2)(b), “to secure that all matters in dispute between the parties are completely and finally determined and all multiplicity of legal proceedings with respect to any of those matters is avoided.” The section this plainly gives the court jurisdiction over a claim which is not yet a cause of action but which may become one as a result of a decision in earlier or related proceedings. Part 20 has been devised for such an contingency and for a case of this kind where a claim is being made for an indemnity. (Biwater’s present claim arising out of Elga’s breach of contract is disregarded for the purposes of this discussion as it would otherwise conclude the issue about the availability of Part 11 in favour of Biwater). It is not necessary or right for a party, such as Biwater, only to make a claim for its indemnity against another party, such as Elga, as and when judgment is entered against it (when, strictly, the obligation to indemnify crystallises). That would lead to multiplicity of proceedings which is the mischief to which section 49 is intended to avert.

22. In turn it is only just, not only to Biwater but also to Elga, that the claim should be heard along with the principal claim. It is just to Biwater because any objections which Elga may make which go to the nature of the claim being made against Biwater can themselves be brought forward, dealt with and disposed of. If they are good they will or may help Biwater to defend the claim being made against it; if bad, they will no longer form part of the proceedings between Biwater and Elga. It is just to Elga that it too should have the opportunity of testing the claims being made against Biwater (whether by Yorkshire Water Services or Taylor Woodrow) so that it is not only satisfied that justice has been done but also, vis-à-vis Biwater, that it will then be bound by the decision on the claim made against Biwater and therefore those points cannot be re-opened as between Biwater and Elga. On that basis Part 11 must presuppose that the question of the court’s jurisdiction to try such a claim could not be decided so early after the issue of proceedings (as contemplated by Part 11) because essentially it is dependent upon the future.

23. Secondly, Mr. Streatfeild-James is right to say Part 11 is really only about such preliminary matters as territoriality. Any other reading would not give practical effect to the rules relating to striking out and summary judgment. They are specifically intended to deal with circumstances where there is no apparent cause of action. It would not be consistent with the overriding objective for Part 11 to duplicate such provisions.

24. Thirdly, paragraph (5)(b) of rule 11.1 means that if the defendant does not act under Part 11, it would be treated as having accepted that the court had jurisdiction to try the claim. That is inconsistent with the overriding objective which is to deal justly with a claim. That includes the interests of a defendant. If Elga were right in its submissions then in every case a defendant faced with a claim which showed no cause of action would, if it did not utilise Part 11, be treated as having accepted that the court had jurisdiction to try that cause of action and, on that reasoning, would then be disabled from utilising either the provisions of rule 3.4 or the provisions of Part 24. However if rule 1.2 is followed, a sensible interpretation of subparagraph (5) is that it does not have far-reaching and, frankly, rather absurd, effect but it is concerned only with preliminary questions to which I have referred which go to the heart of jurisdiction, the competency of the parties, the jurisdictional limits of the court, not with the nature of the claim and the cause of action which may themselves depend upon disputed facts and contentious issues of law and which are not appropriate for determination at this very early stage under Part 11.

25. Accordingly, for those reasons the arguments advanced on behalf of Biwater are correct and accordingly the application should not have been made under Part 11.

26. Elga’s application also contends, in the alternative, that the court should not exercise its jurisdiction to try the claim on grounds set out in its application form. Notwithstanding my principal conclusions, I deal briefly with that secondary case. In my view, even if Part 11 had been appropriate, I would not have exercised the power to dispose of the claim at this stage. I leave aside the other parts of Elga’s application, except to say that, whilst one can sympathise with anybody that is caught up in litigation, it is one of the risks of business and, as such, the expense involved in defending the claim is not in itself justification for detaching Elga from proceedings to which it is logically linked and which may have been caused or contributed to by its own faults. Any assumptions should be made in favour of Biwater. First, the claim includes Biwater’s own claims which have to be tried and cannot be disposed of in limine. Secondly, Biwater’s claim for an indemnity although prospective, involves propositions which Elga challenge (some of which touch on points which will or may be decided soon). As a matter of case management they cannot be disposed of at this juncture, in the interests of Biwater as they may require to be determined either after full argument or in the light of the facts found at a trial. The same applies to Elga’s case for a stay. Thirdly, Biwater’s case depends on proof of Elga’s breach of contract which should or may require to be determined at or following the trial of the main action or Taylor Woodrow’s Part 20 claim.

27. As I said earlier, on the assumption that I am wrong about these conclusions I shall have to deal with grounds 2 and 3 which I will do on another occasion.

JUDGMENT (NO 2)

18 October 2002

1. I deal now with grounds 2 and 3 of Elga’s application. I set them out again.

2. In any event none of the said claims advanced by Biwater against Elga has been (a) submitted by Biwater to Elga prior to 20 December 2001; (b) referred for resolution by negotiation as is mandatory in respect of all such claims as a result of clause 3 of the said contract between Biwater and Elga; or (c) referred to a decision by adjudication (in the event of failure to resolve by negotiation) as is also mandatory as a result of the said clause 3.

3. In so far as Biwater seeks to recover from Elga a sum by way of financial reimbursement equivalent to whatever sum might be due from Taylor Woodrow to Yorkshire Water pursuant to clause 36.7 of the said main contract, any dispute as to the quantum of such claim is a matter exclusively for decision by expert determination, and not by the court.

In this judgment I shall refer to the defendant as TW and to the claimant as YWS.

2. The relevant provisions of the sub-contract of 31 July 1998 between Biwater and Elga were:

“WHEREAS:

(a) The Main contractor has entered into a contract (hereinafter called ‘the Main Contract’) particulars of which are set out in Schedule A hereto.

(b) The Sub-Contractor has agreed to supply and execute the Sub-Contract Works, particulars of which are set out in Schedule C hereto.

NOW IT IS HEREBY AGREED as follows:-

1 DEFINITIONS

In this Sub-Contract unless the context otherwise requires the following expressions shall have the following meanings:

1.1 The ‘Main Contract’ means the contract brief particulars of which are given in Schedule A hereto.

1.2 The ‘Sub-Contract’ means this Agreement and the documents referred to in Schedule B hereto.

1.3 The ‘Sub-Contract Works’ means all Sub-Contract Plant to be supplied, the Sub-Contractor’s equipment and the work to be carried out by the Sub-Contractor all of which are described in Schedule C hereto.

1.4 The Sub-Contract Plant’ means all the permanent plant to be supplied by the Sub-contractor hereunder.

1.5 The ‘Sub-Contract Price’ means the sum specified in Schedule D hereto as payable to the Sub-Contractor for the Sub-Contract Works.

1.6 The expressions ‘Purchaser’, ‘Agent of the Purchaser’, ‘Engineer’, ‘Engineer’s Representative’, ‘Project Manager’, ‘Project Manager’s Representative’, ‘Expert’, ‘Final Certificate’, ‘General Conditions’, ‘Special Conditions’, ‘Site’, ‘Taking-Over Certificate’, ‘Works’, ‘Specification’, ‘Variation’, shall have the same meaning (if any) as is assigned to them under the Main Contract.

1.7 The expressions ‘Project Manager’ or the ‘the Project Manager’s Representative’ hereinafter shall also mean the ‘Engineer’ or the ‘Engineer’s Representative’ as the context of the Main Contractor requires.

2 SUB-CONTRACTOR’S RESPONSIBILITES

2.1 All Sub-Contract Works shall be carried out in accordance with the drawings and specifications detailed in Schedule B hereto and using sound workmanship and materials, shall conform to good engineering practice, be in accordance with the provisions of the Sub-Contract and shall be performed and completed to the reasonable satisfaction of the Project Manager, the Main Contractor and the Contractor and the Sub-Contract Plant shall be in every respect suitable for the purposes for which it is intended.

3 THE MAIN CONTRACT

3.1 The Conditions of the Main Contract (unless amended by this Agreement) shall be deemed to be incorporated in this Agreement and as between the Main Contractor, the Contractor and the Sub-Contractor shall apply to the Sub-Contract Works as they apply to the Works. Upon receipt of written request from the Sub-Contractor the Contractor shall provide a copy of the Main Contract (other than the Contractor’s prices). The Sub-Contractor is deemed to have full knowledge of the Main Contract and is responsible for ensuring his understanding of its contents insofar as they affect the Sub-Contract Works.

3.2 Unless the context otherwise requires the provisions of the Main Contractor shall apply to the Sub-Contract as if the Contractor were the Main Contractor and the Sub-Contractor were the Contractor thereunder.

3.3 Subject to the provisions of this Sub-Contract the Sub-Contractor shall indemnify the Contractor against every liability which the Contractor may incur to any other person whatsoever and against all claims, demands, proceedings, damages, cots and expenses made against or incurred by the Contractor by reason of any breach by the Sub-Contractor of this Sub-Contract.

3.4 The Contractor shall use all reasonable endeavours to ensure that any limitation and exclusions of liability of the Contractor contained in the Main Contract shall extend to protect the Sub-Contractor, his servants and agents.

…

14 REFERENCE TO AN EXPERT/ARBITRATION

14.1 In addition to the provisions of the Main Contract Conditions and in the event that any disputes or differences between the Contractor and the Sub-Contractor arising at any time before the issue of the Final Certificate under the Main Contract or the termination thereof shall be substantially the same as a matter which is a dispute or difference between the Main Contractor, the Contractor and the Purchaser and/or the Project Manager as defined under the Main Contract and which has been referred to an Expert or submitted to arbitration under the Main Contract the Contractor shall be entitled to require the Sub-Contractor to be joined as a party to such reference to an Expert or arbitration. The Sub-Contractor hereby agrees to be so joined and that such dispute or difference with the Contractor shall be referred to an expert or the arbitrator appointed or to be appointed pursuant to the provisions of the Main Contract.

…

17 LAW

17.1 The Sub-Contract shall be construed and operate as an English contract and in conformity with English Law and save for the provisions of clause 14 hereof all disputes relating to this Sub-contract shall be referred to the non-exclusive jurisdiction of the English Courts.

The Main Contract incorporated the standard (red) conditions published by the Institution of Chemical Engineers in 1995. They were however subject to a number of amendments. As amended relevant parts read as follows:

36. Liability for Defects

36.1 If at any time before the Plant or any section thereof is taken over pursuant to Clause 34 (Taking Over) or within a period of three hundred and sixty-five days from the date of the relevant Take-Over Certificate (the Defects Liability Period ) the Project Manager shall:

(a) decide that any work done or Materials supplied by the Contractor or any Subcontractor is or are defective or not in accordance with the Contract (normal wear and tear excepted) or that the Plant or any portion thereof is defective or does not fulfil the requirements of the Contract (any such matter being herein called a ‘Defect’ ); and

(b) as soon as reasonably practicable give to the Contractor notice in writing of such decision giving particulars of the alleged Defects ; and

(c) so far as may be necessary place the Plant at the Contractor’s disposal;

then the Contractor shall as soon as reasonably practicable make good the Defects so specified subject to the Purchaser’s affording the Contractor the necessary access and, where appropriate, permitting any defective Materials to be removed. The Contractor shall, if so required by the Project Manager , submit his proposals for making good any Defect to the Project Manager for his approval.

36.2 If any Defect is attributable to any breach of the Contract committed by the Contractor the Contractor shall bear his own Cost of making good the Defect subject to the provisions of Sub-clause 36.10. In the case of any other defect made good by the Contractor the work done by the Contractor shall be treated as if it were a Variation ordered by the Project Manager and shall be valued accordingly.

36.3 If a Defect is made good after the issue of a Take-Over Certificate the Project Manager may require the Contractor to repeat any appropriate take-over test following the making good of any such Defect for the purpose of establishing that the Defect has indeed been made good.

36.4 If, in the course of making good any Defect , the Contractor carries out a repair or replaces or renews any portion of the Plant , the provisions of this clause shall apply to the repair or to that portion of the Plant so replaced or renewed until the expiration of a period of three hundred and sixty-five days from the date of such replacement or renewal (the extended Defects Liability Period ).

36.5 If the Purchaser reasonably requires that any Defect notified to the Contractor under Sub-clause 36.1 be made good urgently and the Contractor is unable to comply or refuses to make good any such Defect within a reasonable time, then the Purchaser may, without prejudice to any other remedies or relief available to him under the Contract , proceed to do the work in such a manner as the Project Manager may approve.

36.6 If the Contractor shall neglect or refuse to make good as soon as reasonably practicable any Defect for which he is responsible under Sub-clause 36.2 then the Purchaser may, without prejudice to any other remedies or relief available to him under the Contract , proceed to do the work, provided that the Purchaser gives at least fourteen days notice of his intention in writing.

36.7 If the Purchaser has made good a Defect in pursuance of either Sub-clauses 36.5 or 36.6 then the Contractor shall reimburse the Purchaser his reasonable Cost of so doing. Any dispute as to quantum shall be referred to an Expert for resolution in accordance with Clause 45 (Reference to an Expert).

44. Limitation of Contractor’s liability

44.1 The Contractor shall not be liable to the Purchaser by way of indemnity or by reason of any breach of the Contract for:

(a) any loss of production or of any contract that may be suffered by the Purchaser ; or

(b) any wastage, loss or contamination during its use in the Plant of any process consumable which shall be deemed to include feedstocks, chemicals, biochemicals, catalysts and utilities; or

(c) any loss or damage arising from any design or information which the Purchaser has specifically instructed the Contractor to use;

except to the extent that recoveries in respect thereof are obtained under insurance effected pursuant to Clause 32 (Insurance).

44.2 Except in the case of termination of the Contract under the terms of Clause 41 (Contractor’s Default), the liability of the Contractor to the Purchaser for any breach of contract shall be limited to the expenses, charges, damages and reimbursements expressly provided in the Contract . Nothing in the Contract shall in any way be interpreted as affecting or limiting any liability which the Contractor may have under the Consumer Protection Act 1987 or in respect of personal injury or death caused by the negligence of the Contractor (as defined in Section 1 of the Unfair Contract Terms Act 1977).

44.3 Any exclusion or limitation of liability under this Contract shall exclude or limit such liability in contract, tort or otherwise.

45. Reference to an Expert

45.1 There shall be referred to an Expert to be agreed between the parties, or, in the absence of such agreement, to be appointed by the President for the time being (or a Past President) of the Institution of Chemical Engineers upon the application of one or other party, any dispute expressly made referable to an Expert by the Contract.

45.2 Any such Expert shall decide all disputes referred to him as an expert and not as an arbitrator. Any decision of an Expert may revise or overrule any decision or instruction of the Project Manager as may be requisite.

45.3 The Purchaser and the Contractor shall afford any such Expert every assistance in deciding any dispute referred to him and shall give him access to the Site and to their premises and shall provide him with all such information as he may reasonably require.

45.4 The powers of the Expert to determine disputes referred to him shall not be limited to quantum but shall include the determination of contractual and factual issues.

45.5 Any such Expert shall have power by his decision to fix the reasonable amount of his fees in connection therewith and they shall be borne in equal shares between the Purchaser and the Contractor .

45.6 The Purchaser and the Contractor hereby agree to be bound by any decision of an Expert under this clause and shall comply with any direction given therein.

45.7 Any dispute which is referred to an Expert shall thereupon cease to be referable for resolution under Clause 46 (Disputes).

45.8 Neither the Purchaser nor the Contractor shall be entitled to suspend performance of the Contract by reason of the reference of a dispute to an Expert.

The following clause was a complete replacement.

46. Disputes

46.1 Subject to the provisions of Clause 45 (Reference to an Expert), any claim, dispute or difference which may arise between the Purchaser, or the Project Manager acting on his behalf, and the Contractor out of or in connection with the Contract shall be settled in accordance with the provisions of this Clause 46.

46.2 The parties shall attempt to negotiate a settlement in good faith to any such claim, dispute or difference. If the matter cannot be resolved by discussion at PCMG the parties will refer it to adjudication.

46.3 If the parties fail to reach agreement within twenty-eight days (extendable by up to 14 days by the disputing party) of the commencement of the PCMG procedures then it shall be referred for decision to a single adjudicator to be agreed by the parties. On failure to agree within 7 days the President of the Institution of Arbitrators will be requested to appoint. The adjudicator makes his decision within 28 days of appointment. The costs of the adjudicator are shared equally by the parties.

46.4 Subject to the provisions of Sub-clauses 12.5, 17.1, 28.4 and 41.1, any such adjudicator shall have power to revise or overrule any Decision of the Project Manager.

46.5 If the Contractor has complied with any Decision of the Project Manager which his overruled by the adjudicator, and has thereby suffered or incurred any loss or additional expense in the performance of the Contract, then provided that the Contractor has notified the Project Manager that he disputes such Decision before complying with it, the adjudicator may in his discretion award the Contractor a reasonable sum in respect of such loss or additional expense, notwithstanding that the overruling of the Decision would not otherwise entitle the Contractor to any additional payment under the Contract.

46.6 If any dispute which is referable to adjudication is for any reason decided by any court, then the court shall have the same powers in relation thereto as the adjudicator.

46.7 Neither the Purchaser nor the Contractor shall be entitled to suspend performance of the Contract merely by reason of the reference of a dispute to PCMG adjudication or litigation”.

Elga’s case

3. Mr Timothy Elliott QC advanced the following case on behalf of Elga (in summary). First, one had to make sense of a sub-contract that was not well drafted and to bear in mind that it was a sub-sub-contract, even though parts appeared to assume that there were only two contracts – see, for example, the Recital. Furthermore clause 3.1 did not incorporate the sub-contract between Biwater and TW but the main contract conditions between YWS and TW, even though clause 3.2, read literally, might suggest that the provisions of that contract should apply to the sub-contract as if Biwater were TW and Elga was Biwater under a contract between YWS and TW Contract. That apparent conflict could be resolved as the use of the word “thereunder” in clause 3.2 showed that Biwater and Elga should be deemed to be the parties. Thus clause 3.2 ought to be read as if it had said: “… the provisions of the main Contract shall apply to the sub-contract as if [Biwater] were [YWS] and [Elga] were [TW] …”. Clauses 3.1 and 3.2 would then be consistent. Alternatively since clause 3.2 started “Unless the context otherwise requires …” that indicated that clause 3.2 did not apply if it were thought that the main contract should apply to the sub-contract as if Biwater were TW and Elga were Biwater under the main contract.

4. Mr Elliott then posed the question: if the provisions of the main contract were to be “stepped down”, was there any reason why clause 46 should not be “stepped down”? There were no amendments (see clause 3.1: “unless amended by this Agreement”) which might require otherwise. Clause 17 neither amended nor conflicted with clause 46. The requirement that disputes were to be referred to the “non-exclusive” jurisdiction of the English Courts created a strong prima facie case that the English Courts should have jurisdiction over disputes. Mr Elliott referred to The Rothnie [1996] 2 Lloyd’s Rep. 206 at page 211, per Cresswell J.

5. Clause 46 therefore imposed an obligatory dispute resolution procedure of negotiation and adjudication, but the court had residual jurisdiction over justiciable disputes. That construction gave sense and effect to clauses 3.1, 3.2 and 17 of the sub-contract and clause 46.

6. The reference to PCMG in clause 46.2 did not present a difficulty. PCMG (Preferred Contractors Management Group) was a group of Preferred Contractors to YWS. As a matter of fact there was evidence from Biwater that TW and Biwater took part in a PCMG Meeting in February 2001. Elga did not because it was not a Preferred Contractor. Mr Elliott submitted that clause 46.2 as stepped down first imposed an obligation of negotiation in good faith which he maintained would be enforced. Mr Elliott foresaw that the forum for such a negotiation would be the PCMG. If a negotiation in the PCMG was not successful, an adjudication had to follow, as provided by clauses 46.2 and 46.3. Biwater would seek permission from YWS and TW for Elga to attend a PCMG. Alternatively the parties could agree to negotiation between the four of them in any event. If the negotiations failed, Elga was entitled to adjudication in any event under clause 46.3. If either Elga or Biwater were dissatisfied with the adjudicator’s decision, the dispute could be referred to the court.

7. Mr Elliott argued that the contract should be read in favour of negotiation and adjudication. He referred to what I had said in Bernhard’s Rugby Landscapes v Stockley Park 82 BLR 39 at 57: “There is now a tide running in favour of alternative forms of dispute resolution prior to recourse to litigation”, itself based on Channel Tunnel Group v Balfour Beatty [1993] AC 334 which was followed in Cott (UK) Ltd v Barber [1997] 3 All ER 540 (which Mr David Streatfeild-James QC for Biwater mentioned). I digress to observe that Cott is a potentially instructive case. It was about a special provision calling for something in the nature of an expert determination. However it is rather special and I do not consider that it gives Biwater much real assistance. Mr Elliott contended that the court should enforce the agreement for alternative dispute resolution, at least by staying or suspend the Court proceedings until that alternative procedure has been followed. The parties should attempt negotiations before starting on the more expensive route of litigation (particularly if one of them was contending that the legal basis of the claim was invalid). For the same or similar reasons Mr Elliott submitted that any supposed difficulties created by the PCMG not being available to Elga would be met by the substitution of a suitable implied term to the effect that in the event of a failure to agree under clause 46.2 either party had the right to refer the ensuing dispute to adjudication as provided by clause 46.3.

Biwater’s Case

8. Mr Streatfeild-James QC rightly said that Elga’s application depended upon the proper construction of the Sub-Contract. Biwater relied on clause 17 which provided that “…all disputes relating to this Sub-contract shall be referred to the non-exclusive jurisdiction of the English Courts”. Elga had therefore to establish that this provision is not applicable to the claims made in this action to succeed.

9. The claims in the action were for breach of the sub-contract. Biwater made two claims under clause 3.3: a claim for an indemnity for all sums that it was adjudged to owe TW (i.e. claims stemming from YWS’s claims against TW); a claim for an indemnity for £175,885.25 being the costs incurred by Biwater in assisting TW and YWS in remedying the defects. All claims derived from the allegations made by YWS although some of the losses are claimed to have been suffered by Biwater in its own right. They were therefore plainly within clause 17 and were now before the court.

10. Clause 14 was inapplicable as it only operated if Biwater required Elga to be joined as a party to any expert determination or arbitration under the Main Contract Conditions. Elga had no right. In addition there was no right to arbitration under the main contract. The sub-contract apparently did not take account of the fact that the I Chem E Conditions provided for arbitration in lieu of adjudication. Primacy should be accorded to the express terms of the sub-contract. In addition there were insuperable difficulties in “stepping down” the dispute resolution procedures in the main contract via clause 3.1. If that was to be done then there had to be a clear intention to incorporate a dispute resolution procedure. He referred to Merkin on Arbitration paras 4.19 - 4.28 and to the decision of the Court of Appeal in Giffen (Electrical Contractors) Ltd v Drake & Scull Engineering Ltd (1993) 11 Con LJ 122.

11. Mr Streatfeild-James’ argument had a number of principal steps. First, clause 45 contains an obvious internal tension between clause 45.1 (“There shall be referred …”) and clause 45.7 (“Any dispute which is referred shall thereupon cease …”). Under that contract disputes which were capable of reference to an Expert could be determined under Clause 46. Where there was determination by an Expert, it was expressed to be binding.

12. Secondly, clause 46.2 contemplates negotiation in good faith by means of a procedure instituted by YWS for dealing with its “preferred contractors”. TW was one of YWS’s “preferred contractors”. The term had no meaning within the contractual or commercial relationship between Elga and Biwater. Elga was not such a contractor so it was not eligible. Elga had no right to attend any PCMG meetings under the main contract. Indeed the logical consequence of Elga's argument was that its right (if it existed) applied to all disputes, including "domestic" disputes between it and Biwater which had nothing to do with TW or YWS, yet they would have to be ventilated at a PCMG meeting. That was absurd.

13. Thirdly, if it was not eligible then adjudication was not available since it was linked to a failure to reach agreement through the PCMG. In such event a dispute “shall be referred for decision to a single adjudicator” to make a decision within 28 days (see clause 46.3). Clause 46.6 was declaratory in the event that “any dispute which is referable to adjudication” did not reach adjudication, “then the court shall have the same powers in relation thereto as the adjudicator”.

14. Fourthly, there were no procedures to determine whether or not Biwater and Elga have “attempt[ed] to negotiate a settlement in good faith… by discussion at PCMG” as required by clause 46.2 or, indeed, to determine whether a dispute can properly be referred to adjudication under Clause 46.3. Thus Elga could not obtain adjudication. Elga’s implied term failed for lack of precision, and because it was not necessary.

15. Fifthly, it was therefore clear from clauses 45 and 46 that the courts might determine all disputes. Any dispute not referred to an Expert would continue to be a dispute within Clause 46, and so within Clause 46.6. That was indeed what the sub-contract also provided. By whatever route Elga had therefore no contractual right to an alternative dispute resolution procedure which could be enforced by a stay or suspension of the present proceedings. Mr Elliott accepted that the application merely postponed the time when the court might be fully seized of the claim.

16. Sixthly, if incorporated, Clause 46 must be interpreted in the light of Clauses 3.1, 3.2 and 17 of the sub-contract. Provisions of this nature are intended to achieve “back-to back” obligations, the purpose of which is to protect the party with contractual relationships extending in both directions. They were not apt to incorporate a dispute resolution clause: see Giffen .

Decision on Ground 2

17. In my judgment ground 2 in the application has to be tested by basic principles. First, what does the sub-contract say? Clause 17 is very clear. It has two parts. The first is strictly unnecessary as there is no other law that might apply. The second says:

“….save for the provisions of clause 14 hereof all disputes relating to this Sub-contract shall be referred to the non-exclusive jurisdiction of the English Courts.”

Clause 14 does not assist Elga. It only applies at Biwater’s behest. There is no provision for arbitration in the main contract. The provisions for expert determination are irrelevant to this ground. Mr Streatfeild-James said that the opening words of clause 14 were surplusage and I can see no alternative. They form part of a set of conditions that are not well drafted or adapted for use as a sub-sub-contract. I return to the remainder of clause 17. To the extent that it confers exclusive jurisdiction it is unexceptionable. That is commonplace and obviously does not annul any other provision of the contract for preliminary or alternative dispute resolution. The court’s jurisdiction deals with what is left. However the clause uses the imperative words “shall be referred” – words which are commonly used where an alternative to litigation is to be used. In my judgment these words show clearly that the parties’ agreement is clear: all disputes are to be the subject of litigation, if they cannot otherwise be resolved by agreement. That is sufficient to dispose of Ground 2.

18. However the qualification might be “unless the disputes cannot otherwise be resolved”. Accordingly, the next question is: does the contract make provision for some other prior form of dispute resolution? As Mr Streatfeild-James put it: has Elga a right to refer disputes to adjudication? In my judgment Mr Streatfeild-James was right to refer to Merkin and to say that there must be a clear and precise form of incorporation, not because it might be thought to oust the jurisdiction of the courts. That is a dated concept. Today the demand is in the other direction. The CPR have not made litigation about construction disputes markedly attractive, even if this court can offer speed and early dates. However any alternative procedure must be clearly identifiable, workable and certain. Is it provided by or via clause 3? I think not.

19. First, leaving aside any question of amendment to them, clause 3.1 makes “the Conditions of the Main Contract …. apply to the Sub-Contract Works as they apply to the Works . The Sub-Contractor… is responsible for ensuring his understanding of its contents insofar as they affect the Sub-Contract Works .” [my emphasis]. The incorporation effected by clause 3.1 is therefore prima facie limited. Clause 3.2 is wider and if it had stood alone would have sufficed to incorporate a dispute provision in a superior contract that would have worked between Biwater and Elga. However similar provisions were considered in Giffen . Virtually the whole of the report needs to be read:

“In delivering the judgment of the Court, Sir Thomas Bingham MR [with whom Russell and Hobhouse L.JJ agreed] said:

“I should refer to various clauses of the conditions. They define ‘the contractor’ as Drake and Scull Engineering Limited. They define ‘the sub-contractor’ as Giffen and Femwork respectively.

They then provide as follows:

“The MAIN CONTRACT shall mean the Head Form of Contract between the Employer and the Main Contractor as varied by the Contract between the Main Contractor and the Contractor.”

I come to clause 2 which is headed execution of sub-contract work:

“The Sub-Contractor shall perform all the obligations imposed upon or undertaken by the Contractor under his Contract with the Main Contractor in respect of the work and materials referred to in the Form of the Sub-Contract Acceptance as directed by the Contractor and to the satisfaction at all times of the Supervising Officer and the Contractor except in so far as these Conditions modify the conditions of the Contract between the Main Contractor and the Contractor. Such Conditions of Contract may be inspected at our offices by arrangement.”

Then one comes to clause 3 which lies at the heart of the submissions made by Mr Cousins for Drake and Scull. Clause 3, headed “Sub-Contractor Relationship to Main Contract”, reads:

“The Sub-Contractor shall be deemed to have full knowledge of the drawings, specifications, bills of quantities, stipulations and conditions of the Main Contract and agrees to be bound by and perform the same excepting only as varied by these Conditions of Sub-Contract (so far as concerns the subject matter of this Sub-Contract) in the same way in all respects as if the Sub-Contractor were the Contractor under the Main Contract and to relieve the Contractor of all liability in respect thereof. In the event of any breach non-observance or non-performance by the Sub-Contractor the Contractor is to have the same rights in all respects against the Sub-Contractor, the Sub-Contractor’s plant, hired plant or hire purchase plant and effects on the site and otherwise as the Employer or Supervising Officer under the Main Contract has against the Contractor.”

……

In presenting these submissions to this Court, Mr Cousins began by drawing our attention to the detailed language of the Drake and Scull conditions of sub-contract. In doing so, he was, in my opinion, entirely right, since the task that the court has to perform is one of construction. Any process of construction is to be begun by looking at the words that the parties have actually used in order to ascertain what their intention was. It is, of course, well known that the context in which particular words are used may be of great importance with the result that language, taken out of context and construed on its own, may appear to have one meaning, but assumes a different meaning when it is read in the context of a complete contractual document.

Here the question is whether the parties to one contract intended to incorporate in their contract a term from another contract. It is relevant, particularly in the absence of clear and express language, to see how apt and workable the term in question would be if it were so transplanted.

From all this it follows that we have to look very closely at the particular language of the provisions that we have to construe and the particular circumstances of the contract in question.

With that by way of preface, I return to look again at clauses 2, 3 and 7 of the Drake and Scull standard conditions of sub-contract. Clause 2, as it seems to me, expresses in general terms the essence of the sub-contract relationship. In other words, C agrees with B to carry out part of the work which B has agreed with A to carry out. It seems to me that clause 2 of this contract spells out that relationship, no more and no less. It has not been suggested that it has any reference, expressed or implied, to arbitration.

When one turns to clause 3, it appears to me that this clause breaks down into a number of different provisions. It, first of all, says:

“The Sub-Contractor shall be deemed to have full knowledge of the drawings, specifications, bills of quantities, stipulations and conditions of the Main Contract”.

That, I think, is directed to excluding any defence by the sub-sub-contractor or sub-contractor based on his ignorance of what the main contract and associated documents contain. It is quite clearly provided that he is deemed to have had full knowledge of those documents whether he has actually inspected them or not.

The clause continues by providing that the sub-contractor

“……. agrees to be bound by and perform the same excepting only as varied by these Conditions of Sub-Contract (so far as concerns the subject matter of this Sub-Contract) in the same way in all respects as if the Sub-Contractor with the Contractor under the Main Contract and to relieve the Contractor of all liability in respect thereof”.

This, again, as it seems to me, is adding further specific detail and content to what one has already seen in clause 2, making it plain that the sub-contractor is to perform in all respects in accordance with the main contract, such part of the main contract work as falls within the sub-contractor or, in this case, the sub-sub-contract.

Mr Cousins draws particular attention to the reference to stipulations and conditions by which the sub-contractor agrees to be bound and draws further attention to the reference to being bound by these in all respects. He places much reliance on that language as showing that the sub-contractor is, as he submits, to be bound by all the terms and conditions of the main contract including, in particular, for present purposes, the arbitration clause.

Clause 3 continues:

“In the event of any breach non-observance or non-performance by the Sub-Contractor the Contractor is to have the same rights in all respects against the Sub-Contractor, the Sub-Contractor’s plant, hired plant or hire purchase plant and effects on the site and otherwise as the Employer or Supervising Officer under the Main Contract has against the Contractor”.

That is not suggested as having any reference to arbitration and clearly is designed to govern the contractual rights of the contractor against the sub-contractor in the event of breach, which are to be the same as are available to the employer against the contractor under the main contract.

Reading that clause as a whole, it seems to me to follow logically on from clause 2 to define the obligations of the sub-contractor and to make it plain what work he has to do and the standard to which he has to do it. I find in that clause alone no indication whatever that any arbitration clause in the main contract is intended to be incorporated. If, however, having completed one’s perusal of that clause, one is left in any doubt on the subject, such doubt is, in my judgment, dispelled when one looks at clause 7.

Mr Cousins directed submissions to the use of the word ‘assessed’. But, in my judgement, the word ‘assessed’ means no more than calculated. He acknowledged that the reference to arbitration was surplusage, but suggested that it was there for the avoidance of doubt. I feel bound, for my part, to reject that submission since I cannot see any purpose whatever in including a very limited arbitration clause if the arbitration clause in the main contract has already been clearly incorporated. If it has not been clearly incorporated by the language used then I would, for my part, decline to hold that it had been incorporated at all, particularly since one finds nothing in either of the main contract arbitration clauses which fit at all neatly into a dispute between a contractor and a sub-sub-contractor.

In my judgment, therefore, asking oneself the fundamental question whether the language of these clauses points plainly to the intention of the parties to incorporate the arbitration clause in the main contract respectively, my answer is negative. I agree with the conclusion on that point which was reached by each of the learned judges in the courts below.

I should mention that Mr Cousins has helpfully referred us to a number of the leading authorities on the question of incorporation of arbitration clauses. By reference he has referred us to Thomas v Portsea [1912] A.C.1; The Merck [1965] P.223, C.A.; The Annefield [1971] P. 168; C.A.; The Rena K [1979] Q.B. 377; The Varienna [1983] 2 Lloyd’s Rep. 592; [1984] 1 Q.B. 599; The Pine Top Insurance Company Limited v. Unione Italiana Anglo-Saxon Reinsurance Company Limited [1987] 1 Lloyd’s Rep. 476 ; The Federal Bulker [1989] 1 Lloyd’s Rep. 103; and Aughton Limited (formerly Aughton Group Limited) v. MF Kent Services Limited (1991) 57 B.L.R. 6.

It does not seem to me that the authorities help us to resolve the issue in the present case. I certainly do not think it is necessary for us to seek to resolve the difference of opinion that appeared between Ralph Gibson L.J. and Sir John Megaw in the last of the cases cited, which was a case in which the plaintiff in the action was, as in the present case, a sub-sub-contractor. The defendant in the action was a sub-contractor. It was said that there had been an incorporation of an arbitration clause in another contract, as a result of a letter which had informed the sub-sub-contractor that it was to enter into a sub-sub-contract with the sub-contractor ‘based on G C Works 1 as discussed at our meeting on 21.2.88 for the execution of the works’.

As Ralph Gibson L.J. recorded at page 7:

“The arbitration clause was said to be incorporated into the sub-sub-contract by the words in paragraph (7) not from GC/Works/1 but from the conditions of the Press/Kent sub-contract.”

Ralph Gibson J. J went through the details of that case and the authorities with some care and considered to what extent the principles decided in the bills of lading cases were applicable in other contracts. He expressed the view that the distinction between conditions of a contract which define the rights and obligations of the parties with reference to the subject-matter, on the one hand, and those that control or affect the rights of the parties to enforce those rights and obligations by proceedings at law was emphasised in Thomas v. Portsea. He expressed the opinion that distinction was a relevant to a case about engineering works as it was to a case involving charterparty and bill of lading. At page 21 he said:

“It provides good reason for requiring that an alleged intention of the parties to exclude the ordinary right of access to the court by an arbitration agreement, which may well include special terms of limitation, be clearly demonstrated from the terms of the contract”.

On the facts of the case he concluded that in all the circumstances the parties had expressed their intention to incorporate the conditions of the Press/Kent conditions and, accordingly, if the matter had ended there, would have held in favour of the sub-contractor who was claiming a stay. He did, however, find on other grounds that there was no enforceable arbitration agreement.

Sir John Megaw approached the matter from another and somewhat different angle. He drew attention to three important interrelated factors which he regarded as peculiar to arbitration agreements. Those he set out on pages 31 and 32 of this judgment. He concluded in the middle of page 32: ‘If this self-contained contract….’ such as an arbitration agreement, ‘…. is to be incorporated….’ into another contract,

“it must be expressly referred to in the document which is relied on as the incorporating writing. It is not incorporated by a mere reference to the terms and conditions of the contract to which the arbitration clause constitute a collateral contract.”

That observation has been criticised by Mr Cousins as being inconsistent with The Annefield and The Merak. Mr Cousins urges us to prefer Ralph Gibson L.J.’s approach to the matter. I do not, for my part, think it is necessary for us to examine the extent of the difference in principle between Ralph Gibson L.J. and Sir John Megaw which may, on closer examination, turn out to be a good deal narrower than might, at first sight, appear.

I consider that the authorities, although interesting, do not throw real light on the problem which we have to resolve, which is whether the language of the Drake and Scull sub-contract is such as to point to a clear indication to incorporate the arbitration provision of the main contract. As I have already indicated, I consider that the language does not have that effect.

Accordingly, I would dismiss both appeals.”

20. In my judgment there is little real difference between the language used in the sub-contract provisions then under consideration and the present ones. Clause 2 in Giffen was directed to “stepping down” the provisions of the main contract “in respect of the works and materials”; so too is clause 3.1 as regards the sub-contract works. Clause 3 in Giffen is in my view indistinguishable in purpose from clause 3.2 in this sub-contract. As the provisions have to be read together I can see no basis for not arriving at the same conclusion as that reached in Giffen, for the same reasons. The two sets are virtually identical in content when set side by side.

21. In addition, even if clause 3.2 were to be divorced from clause 3.1, I do not see how clause 46 could be transmuted in any satisfactory form. Obviously there is no problem with the opening sentence of clause 46.2, but it is unforceable in law as it is essentially an agreement to agree: Walford v Miles . It was not of course suggested that it was any more than a prelude or key to the second sentence. That sentence cannot sensibly apply between Biwater and Elga (using the deemed terminology of clause 3.2) since Elga was not a preferred contractor. Could the reference to PCMG be ignored so that the provision is a simple reference to contractual adjudication, assisted perhaps by some implied term? If so, then it must also be ignored in clause 46.3 since the timing of its machinery depends on the commencement of the PCMG procedures. That would strip out most of clause 46.3, leaving only a failure to agree within 7 days – but of what? There are a number of possible implications so one cannot say that any must express the presumed intention of the parties. In my judgment it is not possible to borrow the adjudication procedure in the main contract which is designed for use by TWS and its contractors and in some way force it to apply as between a sub-contractor and a sub-sub-contractor. Finally, if Elga were right, then it would be entitled to refer all disputes between it and Biwater to a form of dispute resolution under the main contract including disputes with which neither YWS nor TW had any concern. That is not a sensible interpretation of the sub-contract.

22. In my judgment the views of Sir John Megaw in Aughton v Kent are sufficient and are directly in point: if a dispute resolution procedure is to be incorporated from one contract in another contract “it must be expressly referred to in the document which is relied on as the incorporating writing. It is not incorporated by a mere reference to the terms and conditions of the contract to which [it forms part]”. I therefore reject the second ground relied on by Elga. Moreover the Part 20 proceedings would not have been stayed since in my view there is no reason to suppose that a reference to adjudication would do more than defer the resumption of the proceedings. One mediation has apparently already come to naught. This application at times appeared to have been launched solely as a lever in some negotiations. To have granted a stay or suspension would have prejudiced the highly desirable objective that all the issues arising out of YWS’s claims should be determined by the same tribunal (the court) at the same time.

Ground 3

23. This part of Elga’s case centres on clause 36.7:

“If the Purchaser has made good a Defect in pursuance of either Sub-Clauses 36.5 or 36.6 then the Contractor shall reimburse the Purchaser his reasonable cost of so doing. Any dispute as to quantum shall be referred to an Expert for resolution in accordance with Clause 45 (Reference to an Expert).”

Mr Elliott maintained that, if YWS had a claim under clause 36.7, its quantum would have to be determined by an Expert. Since Biwater seek an indemnity in respect of such a claim, the issue of quantum will only arise if and when YWS have a valid cause of action under clause 36.7 (see clause 44.2) and a finding of liability has been made. Since neither of these conditions has yet been satisfied the question of reference to an Expert does not immediately call for determination but as and when it did then Elga’s point would become relevant, namely that Elga can insist that the question of quantum of a clause 36.7 claim in respect of which an indemnity is sought by Biwater is determined by an expert.

24. Elga’s case was that the effect of clause 3.1 in relation to clause 36.7 meant that, if there were a valid claim to be passed down to Elga via clause 3.3, Elga’s obligation to Biwater would be to indemnify Biwater against a claim made in accordance with the terms of the main contract. The obligation in clause 3.3 to indemnify is expressly stated to be “Subject to the provisions of this Sub-Contract”. Those provisions include clause 3.1 and clause 36.7 (which is deemed to be incorporated). If YWS and TW were to ignore the last sentence of clause 36.7 and to ask the Court to deal with quantum, that course could not bind Elga (or indeed Biwater). If Elga is obliged to indemnify Biwater in respect of a clause 36.7 claim under clause 3.3, it is obliged to do so only subject to the terms of clause 36.7. That includes a determination of quantum by an expert.

25. Furthermore, by clause 3.4 Biwater was obliged to use all reasonable endeavours to ensure that any limitation or exclusions of liability of the contractor contained in the main contract shall extend to protect Elga. Clause 36.7 was a clause which limits liability. Biwater was obliged to give effect to it. In the case of a defect, instead of a claim for general damages for breach, the right of the Purchaser is limited to the remedies in clause 36 – see clause 44.2.

26. Biwater’s case was that its claims were not within the ambit of an expert’s jurisdiction as provided for by clause 45. They were for an indemnity pursuant to clause 3.3 of the sub-contract conditions they are not claims or disputes “expressly made referable to an Expert by the Contract”. In addition, under Clause 3.3, Elga’s liability is to “indemnify [Biwater] against every liability which [Biwater] may incur …”. In such circumstances, there could be no real dispute between the parties as to the quantum of such liability, as Elga is simply obliged to indemnify Biwater for such liabilities as Biwater has itself incurred. Elga was not therefore entitled to the expert determination procedure even if it was applicable.

27. In any event, the agreement of the parties (as recorded in YWS’s Special Conditions) to delete the final words of clause 45.6 of the main contract General Conditions was indicative of the parties’ intention to preserve the jurisdiction of the court in respect of such claims. The arguments which I have upheld were repeated.

28. Clause 36.7 is not a clause which has the effect of limiting liability, but, even if it were, clause 45 is not. It is not right (if that is what is intended) to suggest that by clause 3.4 Biwater is required to exercise any rights it may have to appoint an Expert.

Decision on Ground 3

29. I need not repeat my earlier decision which deprives Elga of a platform for its case. Elga’s case proceeds on a misunderstanding about Biwater’s claims. Each head depends on proving that Elga was in breach of contract. That is the central issue of liability which is not susceptible, even on any variant of Elga’s case, to an expert determination of the kind suggested. If Biwater succeed, then the preceding parts of clause 3.3 give it an indemnity against (a) its own losses (which may be more than the damages ordinarily recoverable for the breach) and (b) any amounts which it may have been held liable to pay TW (on the assumption that the indemnity is of the classic kind). Those amounts will or may in turn include TW’s own costs and amounts due to YWS under the main contract, by virtue of clause 44. They might include costs determined by an expert appointed under the main contract if sought by either party. There is no sign so far that either YWS or TW wish the quantum (which on the face of it probably also includes elements of causation) of YWS’s claim under clause 36.7 to be decided outside the court. All the defending parties contend that YWS is not or not yet in a position to rely on that clause in this action. There is therefore no part of Biwater’s claim which could be referred to an expert, or even if Elga were right, could be referred now to an expert in the absence of any finding of liability or acceptance by Elga of liability.

30. The unreality of Ground 3 is reinforced by the second limb of Elga’s case under this head. First, Biwater is not a position to secure the benefit (if it is a benefit) of clause 36.7. It may be able to question the amount which TW wishes to pass on but I can hardly believe that anyone would be able to establish that the amount of any judgment of this court in respect of a claim under clause 36.7 would be measurably greater than the amount of quantum decided by an expert (which was one Mr Streatfeild-James’ many strands).

31. Above all, however, clause 36.7 is not a provision which excludes or limits liability (as does clause 44 of the main contract). Even if “liability” in clause 3.4 includes “quantum” clause 36.7 does not limit liability. If quantum cannot be agreed so that there is a dispute then it will be decided by an expert under clause 45. That decision effectively defines liability. It does not limit it, still less exclude it. So the major premise upon which this ground of Elga’s application is based is wrong.

This application will therefore be dismissed.