England and Wales High Court (Technology and Construction Court) Decisions

Cegelec Projects Ltd v. Pirelli Construction Company Ltd [1998] EWHC Technology 319 (21st May, 1998)

Before: His Honour Judge Humphrey LLoyd QC
 

B E T W E E N:

CEGELEC PROJECTS LIMITED    Plaintiff

- and -

PIRELLI CONSTRUCTION COMPANY LIMITED    Defendant
 

Case No 1997 ORB 646

Date of Judgment: 21 May 1998
 

1. The defendant, Pirelli, applied for the determination of questions pursuant to RSC Order 14A. They concerned its sub-contract with the plaintiff, Cegelec, for the design, supply and installation of cabling systems, as part of Cegelec's main contract with London Underground Limited for the extension of the Jubilee Line in London. The main contained extensive provisions for the resolution of disputes by reference to the Engineer and conciliation which Cegelec contended were also incorporated in the sub-contract. Cegelec started the action to obtain the following declarations:

2. Although the judgment was given in chambers it may be treated as if given in open court.

 
Mr Timothy Elliott QC appeared for the defendant, Pirelli, instructed by Nicholson Graham & Jones.

Mr Vivian Ramsey QC and Mr David Streatfeild-James appeared for the plaintiff, Cegelec, instructed by Masons.
 

Index

Judgment
Pirelli's Submissions
Cegelec's Submissions
Pirelli's Reply
Decision
 

3. The text of the judgment approved by His Honour Judge Humphrey LLoyd QC is as follows:

J U D G M E N T

1)    The plaintiff, Cegelec, is the main contractor to London Underground Ltd (LUL) for the design, manufacture, installation and commissioning of the power, cabling and conductor rail system for the project to extend the Jubilee Line. The main contract which was dated 1 November 1993 was apparently assigned on 9 May 1994 by GEC Alsthom T & D Electronic Systems Ltd to Cegelec. (The assignment is not admitted but no point at present arises on this.) The defendant, Pirelli, is sub-contractor to Cegelec for the design, supply and installation of cabling systems. The sub-contract was made in November 1994. The price was £19 million. Completion is expected this year. Disputes have arisen between Pirelli and Cegelec. The sub-contract contains an arbitration agreement (to which I shall refer). Pirelli gave notice of arbitration on 26 September 1997 and on 20 November 1997 the President of the IEE appointed Mr Robert Gaitskell QC as arbitrator. Cegelec however contended that any such appointment was premature since, amongst other things, it maintained that before notice of arbitration can be given under the sub-contract disputes have first to be submitted in accordance with the dispute resolution procedure under the main contract with LUL. (It also considered that Pirelli's notice was insufficient.) Accordingly it commenced this action on 14 November 1997 (just prior to Pirelli's request to the IEE to appoint an arbitrator) in order to obtain the following relief:

5)    The arbitration agreement in the sub-contract is contained in two clauses:

In the definitions clause:

"CONTRACT

"COMPLETION

INSTRUCTIONS/DECISIONS

Settlement of Disputes

94.1 If any dispute of any kind whatsoever arises between the Employer and the Contractor in connection with or arising out of the Contract or the carrying out of the Works including any dispute as to any decision, opinion, instruction, direction, certificate or valuation of the Engineer (whether during the progress of the Works or after their completion and whether before or after the determination, abandonment or breach of the Contract) it shall be referred to and settled by the Engineer who shall state his decision in writing and give notice of the same to the Employer and the Contractor. Unless the Contract shall have been already determined or abandoned, the Contractor shall in every case continue to proceed with the Works with all due diligence and he shall give effect forthwith to every such decision of the Engineer. Such decisions shall be final and binding upon the Contractor and the Employer unless and until as hereinafter provided either:

12)    Mr Elliott's submissions were relatively simple. The issues raised by the summons required the ascertainment of the intention of the parties. That was to be derived from the wording used (Pioneer Shipping Ltd v. BTP Tioxide Ltd [1982] AC 724 at page 736B) and was to be judged objectively (Reardon-Smith Ltd v Hansen Tangen [1976] 1 WLR 989 at page 996E). Clause 19 of the sub-contract set out the parties' agreement for the resolution of disputes and it was not necessary to go beyond it. Cegelec's attempt to bring in clause 94 of the main contract was misconceived. Cegelec sought to do so by using, first, clause 3.1 but that only applied to the Sub-Contract Works and then only "except where amended by the Sub-Contract" and, secondly, clause 3.2 whereby the main contract applied to the sub-contract but with "Contractor" substituted for "Employer" and "Sub-Contract" for "Contract", but that was also wrong since there should be no such changes "if the context otherwise requires", and the clauses 19 and 20 of the sub-contract did so require.

13)    Mr Elliott argued that furthermore clause 94 of the main contract conflicted with clause 19 of the sub-contract since the latter provided for the parties to refer a dispute to arbitration at any time, whereas the incorporation of clause 94 would prevent that happening and would at least postpone the commencement of an arbitration until the dispute had been referred to the Engineer, except that if clause 94 was to be rewritten by clauses 1 and 3.2 of the sub-contract (as Cegelec contended) then the dispute would be referred to the Contractor who would then decide a dispute between himself and the Sub-Contractor which, if it were the same as a dispute between the Contractor and LUL, would also be decided by the Engineer. The Contractor would have to notify himself of his own determination. If the Sub-Contractor were to dispute a claim made by the Contractor and if it were referred to the Contractor but if by inadvertence the Contractor failed to decide it the Contractor would under clause 92.2(b) be deemed to have rejected his own claim and the resulting rejection of that claim would be binding on him. In addition therefore to postponing the start of the arbitration Cegelec's interpretation produced unreal and absurd results which showed that it could not be presumed to be the parties' intention. Finally, if clause 94 applied no arbitrator could be appointed until some conciliation procedure had been completed or terminated (assuming that LUL's procedure could be made to fit.) .

14)    Mr Elliott argued that the possible incorporation of clause 94 should not be approached on the same basis as if it were the incorporation of an arbitration clause since Cegelec did not seek to incorporate all the provisions of the main contract but only parts of clause 94 and then wished to modify clause 19 to conform to the main contract. Cases such as Thomas v Portsea Steamship Co Ltd [1912] AC 1, or The "Annefield" [1971] P. 168, or the recent cases of Aughton Ltd v MF Kent Services Ltd (1991) 57 BLR 1, Giffen (Electrical Contractors) Ltd v Drake & Scull Engineering Ltd (1993) 37 Con LR 84 and Roche Products Ltd v Freeman Process Systems Ltd (1996) 80 BLR 110, although of value where the issue was one of incorporation where no provision existed, were of no direct assistance since the question was whether the arbitration clause in the sub-contract should be modified by grafting on the main contract preliminary procedures. Nevertheless His Honour Judge Hicks QC had set out the correct approach in Roche where he had said at page 114:

"THE REASONABLENESS OF THE RESULT

Cegelec's Submissions

19)    Mr Vivian Ramsey QC and Mr David Streatfeild-James for the plaintiff started from a different position since they first contended that clauses 3.1 and 3.2 were effective to incorporate requirements that before initiating arbitration under clause 19 of the sub-contract (a) any dispute had to be submitted to Cegelec for its decision and (b) there had to be a reference of the dispute then resulting to a conciliator.

20)    They submitted that in approaching the question of incorporation the principles to be applied were the same as those which applied in determining whether another alternative dispute resolution procedure - arbitration - was to be presumed to have been agreed by the parties even though it was not specifically referred to. The test was one of the presumed intention of the partes (as set out by Judge Hicks QC in Roche at pages 113-114 and 123). Reference was also as to section 6(2) of the Arbitration Act 1996 which had been based on Article 7 of the UNCITRAL Model Law. That article was considered by Kaplan J in Astel Peiniger Joint Venture v Argos Engineering & Heavy Industries Ltd [1994] 3 HKC 328. He concluded that presumed intention was the test. He referred to Thomas v Portsea, The" Annefield", Aughton v Kent and Giffen v Drake & Scull (amongst others) and said that since Thomas v Portsea did not apply in Hong Kong (as Article 7 of the Model Law applied): "The task before the court in determining whether or not there has been incorporation by reference is one of construction, namely, to ascertain the parties' intentions when they entered into the contract by reference to the words that they used."

21)    Secondly, counsel said that clause 3.2 was enough on its own to incorporate clause 94. The clause identified modifications that might be required. For example clause 1 defined "Employer" as including the expression "Engineer" and so since under clause 3.2 the "Employer" was to be treated as the "Contractor", for the purposes of applying the main contract to the Sub-Contract, the "Contractor" assumed the position of the "Engineer" vis-avis the "Sub-Contractor" who in turn became the "Contractor". Clause 94 was thus workable as between Cegelec and Pirelli.

22)    Thirdly, Cegelec argued that its construction of the sub-contract did not conflict with two general principles. First, that the terms to be imported are imported in their entirety except to the extent that they conflicted with express terms: see Thomas v Portsea and Modern Buildings v Limmer and Trinidad. Secondly, there was no rule of construction which required that only clauses "directly germane" should be incorporated into a sub-contract: Miramar Corporation v Holborn Oil [1984] 1 AC 676. These two principles were reflected in the words "unless the context otherwise requires". Hence Cegelec did not contend that clauses 94.5 and 94.6 were transported into the sub-contract for they conflicted with clauses 19 and 20 and these clauses were the context which required otherwise. However clauses 94.3 and 94.4 were to be incorporated since in clause 94.3 in place of arbitration by an Official Referee the arbitrator would, in the absence of agreement, be appointed by the President of the IEE (as provided by clause 19 of the sub-contract) and clause 94.4 would apply in its entirety substituting "arbitrator" for "Official Referee".

23)    Fourthly, Pirelli was wrong to suggest that Cegelec's construction deprived it of an immediate right to arbitration. Only "disputes ... which cannot be settled amicably" could be referred to arbitration. The effect of the incorporation was to define what was meant by "settled amicably", namely to see if a decision or the recommendations of a conciliator could achieve a resolution of the dispute by amicable agreement. The LUL Conciliation Procedure stated that it was "intended to assist the parties reach an equitable settlement of the dispute."

24)    Mr Ramsey also advanced a further new argument to the effect that as a result of clause 3.2 Cegelec had the power to give decisions under clause 94.1 (as if the Engineer) and Pirelli was in any event bound under clause 8.2 to comply with such decisions of the contractor.

Pirelli's Reply

25)    Mr Elliott reiterated points made in his opening and emphasised that clause 3.2, like clause 3.1, was intended to place Cegelec in a "back to back" situation as regards the works themselves. If Cegelec were right then all the provisions of the main contract applied so that prima facie the Sub-contractor would be entitled to start when Cegelec was to start and to finish when Cegelec were due to finish. Clearly clause 6 of the sub-contract took precedence as a matter of straightforward interpretation, although clause 6 prevailed either because the context required otherwise or because clause 6 "amended" the main contract. Clause 8.2 covered the usual types of instructions or decisions that had to be given in relation to the works. This was borne out by clause 8.3 which provided for their valuation. Decisions under clause 94 did not lead to valuations under clause 8.3. Amicable settlement as provided by clause 19 was not a decision under clause 94 nor the recommendation of a conciliator.

Decision

26)    The arguments of each party seem to show at least that Lewison is not right to say in paragraph 2.06 that "The two approaches [to incorporation] may differ slightly but they achieve the same result" since there is evidently a marked difference between Cegelec's approach (ie to start with the words of incorporation in clause 3 and to treat them as controlling the remainder of the sub-contract) and Pirelli's approach (which is to look at the sub-contract in its entirety with no such presumption). The overriding objective is of course the ascertainment of the parties' presumed intentions from the words that they used. From the cases cited the observations of Sir Thomas Bingham MR in Giffen v Drake & Scull are perhaps as apt as any:

"...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. It is also, of course, familiar to anyone concerned with construing documents that the nature of the transaction may be of relevance.

8. Thus, one finds in the authorities that significance is sometimes attached to the fact that a document is a negotiable instrument, which conditions the mind of the court in trying to discern what meaning the parties intended a provision to have, whereas 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.

9. 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. Unless clear rules have been laid down - and they sometimes have been - for example, as to the meaning to be given to the expression 'condition' in the context of charterparty and a bill of lading, one has, I think to be cautious in reasoning from one case to another since cases appear to turn very much on their own particular terms and their own particular facts."

28)    That approach does not however necessarily dispose of Cegelec's case since clause 19 contains the somewhat ambiguous reference to "at any time any dispute ..... between the CONTRACTOR and the SUB-CONTRACTOR which cannot be settled amicably". These words must refer to a dispute which has not been settled amicably so there is some implicit undertaking to attempt to settle a dispute amicably before a notice of arbitration is given. Does this therefore mean an agreement to obtain a decision and to seek a recommendation from a conciliator? It may be that under a contract such as that between LUL and Cegelec where a dispute has first to be referred to the Engineer then either that procedure in itself or any decision of the Engineer will lead to the dispute being settled amicably whether in anticipation of a decision, or in not risking one, or by accepting the decision, or by negotiating on the basis of the decision. I do not consider that these considerations turn what is essentially an obligatory contractual mechanism for the initial resolution of disputes to enable work to proceed into what would ordinarily be described as amicable settlement. (The FIDIC Conditions for Civil Engineering Works, 4th ed., 1986, and as revised in 1992, specifically provided for amicable settlement to take place after the Engineer had either decided or failed to decide the dispute, from which it is, not surprisingly, plain that amicable settlement is not the process of seeking a decision from the Engineer.)

29)    Cegelec's case was however that the importation of clause 94 had the effect of requiring Pirelli to submit any dispute not to the Engineer under the main contract but to Cegelec itself. In my judgment it is verging on the absurd to think that, as suggested by Cegelec, amicable settlement is represented by a requirement to put a dispute to one of the contracting parties for a decision which if not accepted will become final and binding. The only purpose of such a requirement would be to delay matters for up to three months for a decision need not be given earlier. Whilst there can be value in a "cooling-off" period I can see no reason why Pirelli should be taken to have agreed to a period the length of which will be determined by Cegelec. Such a procedure is at the least not conducive to a dispute being settled amicably and is arguably the antithesis of amicable settlement. In any event it conflicts with clause 19 which permits disputes to be referred "at any time" which is consistent with a party deciding when negotiations (the most usual form of amicable settlement) will not achieve their end. In addition there are the odd consequences demonstrated by Mr Elliott, eg that Cegelec would have to give itself notices etc. Mr Ramsey suggested that in practice the decision would be taken by a director of Cegelec or someone else not connected with the dispute. There is nothing in the contract to that effect and such an unusual stipulation certainly could not be read into it.

30)    Settling a dispute amicably may also mean a discussion as to how best to settle that particular dispute, perhaps with the assistance of a third party. It might therefore cover conciliation but it does not do so in this instance since conciliation is only available on Cegelec's case after it has taken a decision which either it does not accept (a further absurdity) or which Pirelli does not accept. Moreover under the LUL Conciliation Procedure conciliation could be terminated at any time. To import a conciliation procedure such as the lengthy procedure devised by LUL for use between it and a contractor and to make it applicable lock stock and barrel by means of provisions such as those in clauses 3.1 and 3.2 seems to me to be artificial and so far as removed from reality that it cannot be treated as representing the intentions of Cegelec and Pirelli as what might constitute amicable settlement in clause 19. If that is what was intended it would have been signalled. Therefore I do not consider that the reference in clause 19 to amicable settlement imports the main contract procedures which are not voluntary (which is usually of the essence of amicable settlement) but obligatory.

31)    Even on a semantic level I do not consider that clause 3.1 is effective to import clause 94. The main contract is to "apply to the SUBCONTRACT WORKS as it applies to the Works except where amended by the Sub-Contract". In my judgment this means that those provisions of the main contract which are referable to the execution and completion of the sub-contract works are to be applied without the cumbersome need to repeat them. Cegelec is therefore to be placed in a "back-to-back" position as regards the work itself. It is not apt to transpose to the sub-contract level a provision such as clause 94 which has no relevance to any of the Sub-Contractor's obligations in relation to the Works. Judge Hicks QC helpfully described provisions such as those found in clause 94 as "second-order terms" as they do not regulate the parties' substantive rights and obligations. In addition as I have already stated clause 19 must be regarded as amending it so that it has no effect as clause 3.1 does not apply to provisions that are amended by the sub-contract.

32)    Nor do I consider that clause 3.2 has the meaning suggested by Cegelec. The first reason is that it does not apply where "the context otherwise requires". Clauses 19 and 20 provide that context for they deal with dispute resolution and they set out the parties' intentions. Clause 94 is not therefore to apply to the Sub-contract. If the main contract conditions were to apply indiscriminately then to take one example, it would not have been necessary to have included clauses 8.1 and 8.2 in the sub-contract for in relation to the provisions of the main contract concerning the instructions and decisions of LUL and its Engineer they do exactly what Cegelec maintain is the effect of clause 3.2. Of course instructions and decisions are important so it may be that it was the intention of the parties to spell out the effect of clause 3.2. If so, then clause 94 must be regarded as equally important and therefore clause 3.2 would not result in its automatic transposition. In my judgment the principal reason why clause 3.2 is not and would not have been effective to convert the powers given to LUL and the Engineer under the main contract to ones exercisable by Cegelec lies again in the opening words of clause 3.2: "unless the context otherwise requires...". The nature of a sub-contract such as this obviously provides such a context which would make it inappropriate for such a wholesale transportation. The contract has to be read in its entirety. Clauses 6, 8.1 and 8.2 show that the sub-contract is such that certain key topics fall outside clause 3.2 and have to be treated separately. Dispute resolution is plainly a key topic. Judge Hicks rightly observed that it gives rise to contracts in their own right. In my judgment the context of this subcontract requires that it should be treated separately as indeed it was in clauses 19 and 20. Accordingly I also reject Cegelec's submission that the arbitration procedure in clause 94 applies in modified form. The parties' intention was to have their own individual dispute resolution procedure as set out in clauses 19 and 20 with no fetter on the reference on disputes to arbitration other than the need first to see whether the dispute might possibly be settled amicably - almost certainly primarily by discussion and negotiation.

33)    Finally, I reject the proposition that clause 8.2 is to be read as enabling Cegelec to give decisions under clause 94 and thereby requiring Pirelli to submit disputes to Cegelec for decision. This is again a strained and contrived interpretation of the sub-contract. Clause 8 read as whole is plainly concerned with operational instructions and decisions. Clause 8.1 deals with instructions and decisions of the Employer that may be received directly by Pirelli. If they are not confirmed by Cegelec they are to be recorded in a "Notification of Instruction" form. Clause 8.2 gives Cegelec the same powers to give instructions and decisions as LUL (and by definition the Engineer) has in relation to the main works. So "instructions and decisions" here naturally mean the same kinds of instructions and decisions as are referred to in clause 8.1 ie ones that will affect the sub-contract Works. In addition decisions under clause 94 affect Pirelli's rights and obligations under the sub-contract but not (or not necessarily) the sub-contract works. Clause 8.3 then provides that the "instructions and decisions" mentioned in clause 8.1 and 8.2 are such that compliance with them may be valued. Compliance with a decision under clause 94 cannot in any normal sense be the subject of a valuation. Clause 94 does not say that compliance by Cegelec with decisions of the Engineer are to be valued by the Engineer. Cegelec's suggested interpretation of clause 8.2, even if in places sustainable as a matter of language, makes no commercial sense.

34)    Accordingly Pirelli is entitled to the orders and declarations sought by its summons.

Index of Judgments