England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
NEWCASTLE UPON TYNEDISTRICT REGISTRY

		The Court House Oxford Row Leeds LS1 3BG
		30/03/2016

Judge Behrens:

1. Introduction

1. This is an application, issued on 2.7.15, of the Applicant (Barrier) for pre-action disclosure under CPR r.31.16 against the Respondent (Redhall).
2. In December 2001 Redhall entered into a contract with BAE for the construction of Astute Class submarines for the Ministry of Defence (MoD). In January 2002 Redhall then sub-contracted part of its functions under the Main Contract to Barrier. Barrier's role under the Sub-Contract related mainly to painting the submarines internally and externally.
3. The Sub-Contract is for 3 submarines only – Boats 1 to 3. It is common ground that Barrier carried out work on 3 other submarines, Boats 4 to 6.
4. It will be necessary to refer to the Subcontract in more detail later in this judgment. It is, however, common ground that under clauses 4.2 and 4.3 Redhall is only obliged to pay Barrier out of moneys that have been paid to it by BAE under the Main Contract.
5. Barrier contends that substantial sums have been deducted by Redhall in respect of the sums otherwise due to them. These are set out in the agreed case summary as follows:

A. Deduction by Redhall of sums of between £88k and £130k due to Barrier on "the Workscope".

B. Deduction by Redhall of £240k on the Workscope.

C. Deduction of £60k from the Workscope, ostensibly in anticipation of an audit to be carried out by BAE for 2013-14.

D. Non-payment of 50% of the "Fixed Lump Sum". This relates to Boats 4 to 6 and quantum is undetermined.

6. Barrier is contemplating proceedings against Redhall to recover these sums. However it appreciates that if these deductions have in fact been made by BAE the action will fail. The purpose of this application is to discover whether there any documents in Redhall's custody, possession or power which will show what payments have been made by BAE and whether these deductions have in fact been made.
7. Redhall seeks to defend the application on a number of grounds. First, it asserts that the subcontract incorporates an arbitration agreement. If so any proceedings are liable to be stayed with the result that there is established authority that there is no jurisdiction to make an order for pre-action disclosure. Second, it asserts that no such documents exist. Third it contends that the order sought is too wide.
8. Barrier does not accept that any arbitration agreement was incorporated into the subcontract. It further distinguishes between Boats 1 – 3 and Boats 4 – 6. Even if the contract for Boats 1 – 3 incorporated the arbitration clause it does not accept it was incorporated for Boats 4 to 6.

2. Incorporation

9. It is convenient to deal with the incorporation issue first in relation to Boats 1 – 3.

The contract documentation.

The Purchase Order

10. Redhall was previously known as Chieftain Insulation Ltd. (CIL). It changed its name to Redhall on 1^st April 2011.
11. It is not in dispute that in December 2001 CIL sent Barrier a purchase order in respect of painting and scaffolding work on Astute Submarines. The Purchase Order was numbered 122274. It purported to come from Chieftain Power Services Ltd (CPSL) which is not the same company as CIL but is a company within the same group. On the face of the document there appears this sentence.

"The terms overleaf must be read and strictly adhered to."

12. The evidence establishes that there are at least two copies of every purchase order. The top copy is designed to be sent to the client has CIL's standard conditions on the back. The carbon copy, which is yellow, is retained by CIL and has nothing on the back. All the companies within the group use the same standard conditions and similar forms of purchase order.
13. Barrier has produced the purchase order that was sent to it in December 2001. It appears that for some unexplained reason it was sent the yellow carbon copy with no conditions on the back.
14. The Standard Conditions of CIL include as Condition 18:

"18. Arbitration.

Any dispute or indifference (sic) arising from the Contract shall on application of either Seller or Purchaser be submitted to arbitration in accordance with the Arbitration Act 1950 or any amendment or re-enactment thereof for the time being in force."

15. It is not in dispute that, if incorporated, this would be an effective arbitration clause which would be effective to prevent the application for pre action disclosure.
16. In the course of his submissions Mr Menon drew my attention to a number of the Standard Conditions which he submitted were unsuitable for a contract such as this. These included a clause about packing and a clause about patents. It is not necessary to refer to them in detail.

The Main Contract

17. The Main Contract between BAE and CIL is lengthy and detailed. It contains an arbitration clause in clause 19 and a privacy clause in clause 20.

Clause 19.03 – "If within 30 days of either party giving the other notice of any matter or thing which constitutes a dispute, difference or question relating to the Contract, other than a matter or thing as to which the decision of any person or persons named in the Contract shall be final and conclusive and except to the extent to which special provision for arbitration is made elsewhere in the Contract, and the Shipbuilder and the Contractor have failed to reach agreement, then subject as expressly provided in this Contract such dispute, difference or question shall on either party serving a notice of arbitration on the other, be referred to the arbitration of two persons, one to be appointed by the Shipbuilder and one by the Contractor, or their Umpire, in accordance with the provisions of the Arbitration Act 1996."

Clause 19.05 – "If any dispute, difference or question raised under this contract raises issues which are substantially the same as or connected with the issues between the Shipbuilder and any Sub-contractor, sub-Sub-contractor and so on of the Contractor, then, at the option of the Shipbuilder such dispute shall also be referred to arbitration under this Contract …"

Clause 19.06 – "For the avoidance of doubt it is agreed between the parties that the arbitration process and anything said, done or produced in or in relation to the arbitration process (including any awards) shall be confidential as between the parties, except as may be lawfully required in judicial proceedings relating to the arbitration or otherwise. No report relating to anything said, done or produced in or in relation to the arbitration process may be made beyond the tribunal, the parties, their legal representatives and any person necessary to the conduct of the proceedings, without the concurrence of all parties to the arbitration."

Clause 20.14 – "The Contractor shall procure that all Sub-Contracts include a resolution of disputes provision and that any question, disputes or differences raised in connection therewith are settled in private."

The Subcontract

18. The subcontract is dated January 2002 and made between CIL and Barrier. It is short 3 page document containing only 10 clauses. I was referred in particular to clauses 1, 9 and 10.

Clause 1 – "This Agreement relates to the three submarines covered by BAE Systems Marine Limited's Purchase Orders addressed to CIL and dated 14 December 2001 and numbered AC22T0589, AC23T0589 and AC24T0589 and the terms and conditions and the Schedules referred to therein, copies of which has been provided to Barrier and is hereafter referred to as "the Contract". Barrier participated with CIL in negotiating and agreeing the Contract terms."

Clause 9 – "The terms of the [Main] Contract shall be incorporated into this Agreement so as to bind Barrier to perform its terms save only where inconsistent with the express terms of this Agreement. For the avoidance of doubt and without limitation this shall include BAE SYSTEMS break clause (section 1, Contractors Clauses and Conditions Ref: V/SSC/1 (astute Class) Issue 10/99, Clause 12)."

Clause 10 – "Subject to paragraph 9 of this Agreement, CIL's standard terms and conditions, a copy of which was on the reverse of the CIL Purchase Order number 122274 dated 21 December 2001, shall be incorporated into this Agreement save only where inconsistent with its express terms, including, without limitation, the terms of the Contract incorporated by paragraph 9 above. For the avoidance of doubt, Purchase Order number 122274 dated 21 December 2001 is otherwise superseded by this Agreement."

19. A number of points can be made at this stage:

1. As is clear from clause 1 it only expressly applies to 3 submarines. Furthermore Barrier had some specified part in the negotiations.

2. Clause 10 expressly incorporates CIL's standard terms and identifies them by reference to the Purchase Order. However it refers to it with a date and as being a "CIL" Purchase Order whereas, as noted above, the copy produced by Barrier is a CPSL purchase order without any terms on the reverse.

Submissions and Discussion

20. Ms McCarthy submitted that the provisions of the subcontract were sufficient to incorporate the arbitration clause in CIL's standard terms. Alternatively she contended that clause 9 of the subcontract was effective to incorporate clause 19 of the Main Contract. She submitted that the ordinary contractual rules apply. In paragraph 26 and 27 of her skeleton argument she puts the point in this way:

26. The Terms and Conditions were part of a standard form contract provided by CIL, which were communicated to the Applicant at the time of the contract. The Applicant did not need to have read the Terms and Conditions in order to be bound by them; the Courts have identified three circumstances regarding notice of such terms [Chitty, 32^nd ed, at 13-013]:

"if the person receiving the document did not know that there was writing or printing on it, he is not bound;

If he knew that the writing or printing contained or referred to conditions, he is bound;

If the party tendering the document did what was reasonably sufficient to give the other party notice of the conditions, and if the other party knew that there was writing or printing on the document, but did not know it contained conditions, then the conditions will become the terms of the contract between them."

27. Further, "it is not necessary that the conditions themselves should be set out in the document tendered: they may be incorporated by reference, provided that reasonable notice of them has been given." [Chitty 32^nd ed., at 13-014].

21. Mr Menon submitted that special rules apply to the incorporation of arbitration clauses. He referred me to the decision of the Court of Appeal in Aughton Ltd v M.F. Kent Services Ltd [1991] 57 BLR 6 where somewhat differing views were expressed by each of the two members of the court. Lord Justice Ralph Gibson thought that there was no special rule of construction that general words would not incorporate an arbitration clause; but that the question was whether the parties so clearly expressed by the words used an intention to incorporate the relevant clause that the Court had to modify its terms so as to be applicable to disputed under the sub-sub-contract. Sir John Megaw thought that an arbitration clause could not, even outside the bill of lading context, be incorporated by general words. He observed that it was implicit in the speeches in Thomas v Portsea that clauses in the charterparty other than the arbitration clause could be validly incorporated by the use of general words, such as clauses governing the shipment or carriage or delivery or the terms upon which delivery was to be made or taken. It followed that the reason for excluding an arbitration clause was not confined to the special features of the charterparty/bill of lading relationship nor to the fact that the bill of lading was a document of title.
22. He submitted that on Ralph Gibson LJ's test the incorporation was not sufficiently clearly expressed. On Sir John Megaw's test the general words in clause 18 were plainly insufficient.
23. This area of law was considered by Christopher Clarke J in a comprehensive judgment in Habas Sinai v Sometal [2010] EWHC 29 Comm In paragraph 13 of his judgment he pointed out that parties are free to incorporate (or seek to incorporate) whatever terms they choose by whatever method they choose. He identified 4 separate situations:

1. A and B make a contract in which they incorporate standard terms.

2. A and B make a contract incorporating terms previously agreed between A and B in another contract or contracts to which they were both parties

3. A and B make a contract incorporating terms agreed between A (or B) and C.

4. A and B make a contract incorporating terms agreed between C and D.

24. After an exhaustive review of the authorities (including Aughton Ltd) he expressed his conclusions in paragraphs 46 – 49 of his judgment. The essence of his reasoning is paragraphs 46 and 49.

46. Where parties are in dispute as to what they have agreed the task of the Court is to determine from the communications that passed between them in the context in which those communications were made what reasonable persons in their position would regard them as having intended to agree. Where those parties agree the essential terms of a contract and also that their contract shall include the terms of a previous contract or contracts between them the Court may have to determine which provisions of which contract(s) they meant to incorporate. If the Court is able to decide what those provisions were, it should not, in my judgment, be astute to impose any special rules which limit the ability of the parties validly to agree what, on ordinary principles of construction, they would be taken to have agreed.

49. There is a particular need to be clear that the parties intended to incorporate the arbitration clause when the incorporation relied on is the incorporation of the terms of a contract made between different parties, even if one of them is a party to the contract in suit. In such a case it may not be evident that the parties intended not only to incorporate the substantive provisions of the other contract but also provisions as to the resolution of disputes between different parties, particularly if a degree of verbal manipulation is needed for the incorporated arbitration clause to work. These considerations do not, however, apply to a single contract case

25. Thus it can be seen he distinguished between the case where there are only two parties involved where no special rules apply and the case where the attempt is to incorporate an arbitration clause between two other parties or one of the parties and a third party. In that situation there is a particular need to be clear that the parties intended to incorporate the arbitration clause.
26. Christopher Clarke's approach was followed by Beatson J in TTMI SARL v Statoil [2011] EWHC 1150 (Comm) where he said at paragraph 51:

Mr MacDonald Eggers relied on Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AA v Sometal SAL [2010] EWHC 29 (Comm), to show that a more restrictive approach to incorporation is adopted where the issue is whether the parties have incorporated the terms of a contract between two other parties than where the issue is whether they have incorporated the terms of a previous contract between them. In that case Christopher Clarke J stated (at [34]) that in the former situation "clear words" are needed because arbitration clauses are not "germane or directly relevant to" the main subject of the contract, are "ancillary provisions", and "oust the jurisdiction of the courts". See also the reference to the need for "specific words of incorporation" in Aikens, Lord and Bools, Bills of Lading (2006), 7.99(5). I consider that these requirements are satisfied in this case. I have referred to the reference in the Notices of Readiness to the "the terms and conditions of" the recap email "dated 17 October 2005". Those terms and conditions included an explicit reference to clause 43 of the Shellvoy 5 charter-party form containing the arbitration clause and the notation "OK"

27. I propose to follow the same approach. I am content to assume (without deciding) that the purchase order sent to Barrier had no conditions on the back. For some unexplained reason the wrong copy was sent or given to Barrier. However a reasonable person reading clause 10 of the subcontract would have no doubt that CIL's standard terms were incorporated. The fact that they were not on the back of the purchase order does not affect this. It would, at all times have been open to Barrier to request a copy of the terms if they had wanted to.
28. The incorporation of clause 19 of the Main Contract is more problematical. This is the incorporation of terms in a contract between BAE and CIL. Thus clear words are required. There are considerable difficulties in incorporating clause 19 in that significant modifications would be required and it is not easy to see how clause 19.5 can be adapted without doing significant violence to the wording. In my view the wording of clause 9 of the sub-contract is not sufficiently clear to incorporate the arbitration clause in the Main Contract.
29. In my view, however, clause 18 of CIL's standard terms was incorporated. It follows that in the light of Travelers Insurance Company Ltd v Countrywide Surveyors Ltd [2010] EWHC 2455 (TCC) that the application for pre- action disclosure in respect of Boats 1 – 3 must fail.

Boats 4 – 6

30. It appears that the instructions in relation to Boats 4 – 6 were oral. The only document to which I was referred was the Minutes of a relationship meeting held on 29^th October 2012 attended by Mr Goodenough, Mr Gray and Mr Burrows of Redhall and Mr Bowles and Mr Harriman.
31. The Relevant Minute records the fact that there is no contract for Boat 4 onwards. It continues:

RNL and Barrier agreed the following:

All works completed under Sis for Boats` 4 and 5 do fall under the contract in accordance with Addendum 4 (attached for information)

RNL and Barrier agreed the following:

Neither RNL nor Barrier are contracted to complete the full scope of supply for Boats 4 and 5.

This position supersedes all comments/actions stated in any correspondences referred above.

32. Addendum 4 is a document between BAE and CIL. It refers to a number of further purchase orders at least one of which referred to Boat 4. It acknowledged that the purchase orders were a modification to the [Main] Contract and that further work may be needed to be incorporated into the Contract in particular until such time as a separate Boat 4 Contract is agreed.
33. In paragraphs 12 – 17 of his witness statement dated 11 June 2015 Mr Bowles deals with Boats 4 – 6 in paragraphs 12 – 17 of his witness statement. In summary he says:

1. He was instructed to carry out work on Boat 4 in 2007 with reference to Addendum 4. He was handed a copy of Addendum 4.

2. He suggests that there was a variation of the payment structure in 2007 but there were no other significant amendments to the subcontract.

3. He was later instructed orally to carry out on Boats 5 and 6. There was no suggestion that this work was to be carried out on different terms and he suggests that the terms were the same as for Boats 1 to 3.

Discussion

34. It is, of course, part of Barrier's case that the contracts for Boats 4 to 6 are subject to the modification referred to by Mr Bowles on the same terms as the contract for Boats 1 – 3. For reasons I have given that would include the arbitration clause.
35. However the question arises as to whether the contracts for Boats 4 – 6 are contracts in writing within the meaning of the Arbitration Act 1996. If not the provisions of Part 1 (including the right to stay proceedings) would not be incorporated.
36. Agreements in writing are widely defined in s 5 of the 1996 Act.

5 Agreements to be in writing

(1) The provisions of this Part apply only where the arbitration agreement is in writing, and any other agreement between the parties as to any matter is effective for the purposes of this Part only if in writing.

The expressions "agreement", "agree" and "agreed" shall be construed accordingly.

(2) There is an agreement in writing--

(a) if the agreement is made in writing (whether or not it is signed by the parties),

(b) if the agreement is made by exchange of communications in writing, or

(c) if the agreement is evidenced in writing.

(3) Where parties agree otherwise than in writing by reference to terms which are in writing, they make an agreement in writing.

(4) An agreement is evidenced in writing if an agreement made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties to the agreement.

(5) An exchange of written submissions in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against another party and not denied by the other party in his response constitutes as between those parties an agreement in writing to the effect alleged.

37. So far as Boats 4 – 5 are concerned it seems to me that the agreement is evidenced in writing, that is to say the Minute of the 29^th October 2012 meeting which incorporates the work for those 2 boats into the subcontract.
38. Boat 6 is not mentioned in any written document. No authority was cited to me on the construction of s 5. However it seems to me to follow from Mr Bowles's evidence that the parties agreed that the work on Boat 6 would be carried out subject to the sub- contract as modified in the way he suggests. In those circumstances it would be within s 5(3) of the 1996 Act.
39. It follows in my view that the contract in respect of Boat 6 also incorporated the arbitration clause in CIL's standard terms. If, contrary to my view, the arbitration clause was not incorporated into Boat 6, Barrier still has to overcome the other three jurisdictional hurdles in CPR 31.16 (3)(d). In other words disclosure must be desirable to dispose fairly of the anticipated proceedings or to assist the dispute to be resolved without proceedings or to save costs. I would probably have held that these objectives could be met if there had been no arbitration clause in respect of Boats 1 – 5. It might well have enabled Barrier to have discovered at an early stage whether any deductions had in fact been made by BAE which had simply been passed on to Barrier. In that event there would have been little point in issuing proceedings.
40. However I have great difficulty in seeing how pre-action disclosure in relation solely to Boat 6 is going to achieve any of these objectives. There will still be a dispute with regard to Boats 1 – 5 which will have to be determined by arbitration. It seems to me very unlikely that there would be any significant overall saving of costs. Furthermore the issues in respect of Boat 6 are less clear than those in respect of Boats 1 -3. Even if these jurisdictional hurdles could be overcome there is a discretion as to whether pre-action disclosure should be ordered. As a matter of discretion I would decline to order pre-action disclosure in respect of only Boat 6.

3. Conclusion

41. It follows that this application for pre-action disclosure falls to be dismissed.