Scottish Court of Session Decisions

[1] In or about November 1998 the pursuers and the defender entered into a contract under which the former undertook to construct for the latter a showroom, office block and workshop at Newhailes Industrial Estate, East Lothian. The contract was in the form of the Scottish Building Contract With Contractor's Design (July 1997 Revision) subject to certain amendments and modifications. It was a "construction contract" within the meaning of section 104 of the Housing Grants, Construction and Regeneration Act 1996 ("the 1996 Act"). The Date of Possession was 12 November 1998 and the Date for Completion 16 March 1999.

[2] The pursuers commenced and ultimately completed the works. The defender maintains that they failed to complete them by the Date for Completion, even as that was agreed to be extended. By some time prior to August 1999 various interim payments had been made to the pursuers but a balance of about £40,000 of the contract sum remained unpaid. On 17 August 1999 the Employer's Agent, Messrs Ryden, wrote to the pursuers stating that a balancing payment of £40,379.40 was outstanding. They continued -

Two bases of claim were then specified, the first (in a total sum of £10,408) being for "L & A Damages for Delay" and the second (in a total sum of £28,136) being for "Direct Costs Incurred".

[3] The letter continued -

So far as appears, that proposal was not responded to by the pursuers.

[4] On or about 22 November 1999 the pursuers delivered to the defender an invoice for the sum of £41,277.05 (inclusive of VAT) in respect of monies claimed by them under the contract. The defender did not respond in writing to that invoice; but he avers that on the day he received it he telephoned the pursuers' office and, on being informed that the individual in the pursuers' organisation responsible for the contract was unavailable, left a message for him with the pursuers' telephonist. That message, the defender avers, referred the pursuers to the fact that the parties were already in dispute regarding further payment and specifically referred to Messrs Ryden's letter of 17 August.

[5] In February 2000 the pursuers raised the present action for payment of the sum of £41,277.05. The Defences lodged included a plea that the action be sisted for arbitration. It being clear at the preliminary hearing that the pursuers intended to resist that plea and that the issues relative to it required further to be focused, the case was continued for adjustment on that aspect and thereafter for a hearing on the defender's motion to sist. Parties duly adjusted and were then heard on the motion.

[6] The contractual provisions relative to payment, in so far as material, are as follows:

[7] The contractual provisions relative to arbitration comprise clause 7 of the Building Contract and clause 39 of the relative Conditions (as amended). They are respectively in the following terms -

The pursuers, in resisting the defender's motion that the court sist the action for arbitration, also rely on certain provisions of the 1996 Act. The material sections, all contained in Part II of the Act, are:

The applicable Scheme is that contained in The Scheme for Construction Contracts (Scotland) Regulations 1998 (1998 S.I. 687) which came into force on 1 May 1998.

[8] The contractual provisions do not specify a "final date for payment" or a "prescribed period" before the final date for payment. The pursuers aver that by application of the Scheme the final date for payment was 23 December 1999. By paragraph 10 of the Scheme the prescribed period for the giving of an effective notice under section 111 expired 7 days before the final date for payment.

[9] The issue for determination is whether there exists a dispute or difference between the parties within the meaning of clause 7 of the Building Contract, as read with clause 39 of the Conditions, which requires the court to sist this action for arbitration in respect of that dispute or difference. I should mention that the Defences (as adjusted) make averments of alleged breaches other than those referred to in the letter of 17 August 1999 but these were hardly touched on in the discussion before me and I do not regard them as material to the present issue.

[10] It is not disputed that the contractual arbitration provisions are of a "general" or "universal" character (as distinct from being "restricted" or "executorial"). As such they might encompass disputes over matters of law. It is also conceded by the pursuers that, as a general proposition, a question whether or not a notice has been duly given could fall within these arbitration provisions, though they contend that in the present circumstances no such question does so fall.

[11] It is plain that, where parties have entered into a contract which includes arbitration provisions of so comprehensive a character, the circumstances in which the court may properly refuse a motion by a defender to sist for arbitration are strictly limited. The circumstance that the pursuers make a claim for payment under the contract and the defender resists that claim might suggest that inevitably there is a "dispute" or "difference" between them which, if either party so insists, requires to be determined by an arbiter rather than by the court. However, despite the apparent logical puzzle, there is authority binding on me to the effect that the court, before sisting for arbitration, must examine the matter raised and satisfy itself that there is truly raised between the parties a question which amounts to an arbitral dispute. In Albyn Housing Society v Taylor Woodrow Homes Ltd 1985 S.C. 104 Lord Hunter, with whom the other judges of the Extra Division agreed, said at p.107 -

The required examination may involve the court itself considering arguments on legal issues, including the construction of the relevant contract. That consideration may result in the court holding that an argument on interpretation advanced by one party is so clearly lacking in substance that there is no question "truly raised" for an arbiter to decide (Mackay & Son v Leven Police Commissioners, per Lord Adam at p.1102). The court's view on interpretation may also lead to the conclusion that a claim by a defender to withhold monies may, in whole or in part, be so ill-founded that there is no real dispute for arbitral adjudication (Redpath Dorman Long Ltd v Tarmac Construction Ltd, per Lord Ross at p.18). There is, of course, a danger that by entering upon questions of interpretation the court will be at risk of arrogating to itself the function of adjudication committed by the parties to arbitral decision. But the effect of the authorities seems to be that, at least if the legal position is "perfectly clear" (Lord Adam) or the claim to set-off "clearly" does not fall within the contractual provision relied on (Lord Ross), there does not exist a dispute or difference for arbitral determination. Lord President Clyde in Woods v Co-operative Insurance Society speaks at p.699 of the legal position being "unmistakeably obvious". He continues -

There may, in the judgement of the court, truly be no room for such difference even if a party insists that there is.

[12] In the present case the first matter which arises for the court to determine is whether it is unmistakeably clear that the defender failed effectually to operate clause 30.3.4. The pursuers maintain that he so failed, the defender that he did not. Mr Ross for the pursuers did not argue that an oral communication could never constitute a notice for the purposes of that sub-clause. His argument was that the telephonist could not in any relevant sense be said to represent the pursuers and that there was nothing in the defender's averments to suggest that any message left with him or her had been passed on to a person who did represent them; this was of particular importance, it was said, having regard to the content required of a notice under the sub-clause. I am unable to accept that argument. On the basis of (1) the concession that a question whether or not a contractual notice had been issued was, as a general proposition, a matter capable of giving rise to an arbitral dispute and (2) the absence of any argument that writing was a prerequisite to any valid notice under this sub-clause, the question whether an effectual notice was issued in this case appears to me to raise factual and legal issues, including issues of agency, which fall within the arbitration provision. It cannot be said unmistakably that the communication did not satisfy that sub-clause. In these circumstances it is unnecessary to discuss a further contention advanced by Mr d'Inverno for the defender that, even if clause 30.3.4 was not satisfied, the defenders had (under reference to Redpath Dorman Long Ltd v Cummins Engine Co Ltd 1981 S.C. 370) an argument amenable for consideration by an arbiter that at common law the defender had a right, unexcluded by this contract, to retain against the Interim Payment his contra-claims for liquidated damages and otherwise.

[13] There remains the pursuers' argument under the 1996 Act. Two matters of statutory interpretation were raised. The first was whether, as the pursuers contend, an effective notice within the meaning of section 111 requires to be in writing. Mr d'Inverno in the end effectively conceded that it did. Although the words "in writing" are not expressly used, I am satisfied that it unmistakably appears that writing in some form is required. This is so, in my view, having regard not only to the language of section 111 itself, including the use of the indefinite article ("an effective notice", "a notice") and the requirement to "specify" particular matters, but also to the language of section 115 and, in particular, section 115(6) which contemplates that a notice under Part II will be in some form of writing. A telephone message, even one referring to a particular letter of earlier date, will not suffice.

[14] The second matter raised was whether a notice effective for the purposes of section 111 could be a communication in writing sent earlier than the making of the relevant Application. Mr d'Inverno pointed out that, while section 111(2) provided that any notice must be given not later than a particular time, it did not provide that it required to be given after any particular time, i.e. there was no terminus a quo. The letter of 17 August, albeit sent prior to the invoice of 27 November, was (or was arguably) a notice of intention to withhold payment within the meaning of section 111. I am unable to accept that argument. The purpose of section 111 is to provide a statutory mechanism on compliance with which, but only on compliance with which, a party otherwise due to make a payment may withhold such payment. It clearly, in my view, envisages a notice given under it being a considered response to the application for payment, in which response it is specified how much of the sum applied for it is proposed to withhold and the ground or grounds for withholding any amount. Such a response cannot, in my view, effectually be made prior to the application itself being made. It may, of course, be that the matter of withholding payment of any sum which might in the future be applied for has previously be raised. In such circumstances a notice in writing given after receipt of the application but which referred to or incorporated some earlier written communication might suffice for the purpose - though I reserve my opinion on that matter. But such an earlier written communication, whether alone or referred to subsequently in an oral communication, cannot, in my view, suffice. This is, as a matter of statutory interpretation, in my view, unmistakeably the case.

[15] Although it was somewhat tentatively suggested that the contract may have been varied by the actings of the parties, it was not contended that for the purposes of section 111(1) the sum for which the invoice was issued was not "due under the contract" - no doubt because, whatever the position as a matter simply of interpretation of the contract, the Act and the Scheme had that effect. In these circumstances it is clear, in my view, that the defender has not complied with section 111 and that, as regard this aspect of the case, no question for arbitral decision truly arises.

[16] I would add that I have serious doubts whether the letter of 17 August was, in any event, in its terms apt as a notice of intention to withhold payment. While it identifies certain sums which the writer contends should "be accounted for prior to any balancing payment being made" and identifies the bases for so doing, it is in effect an offer to compromise in a restricted sum. It in no way unequivocally states that, in the event of a further application for payment being made by the pursuers, the defender will withhold payment to the extent and on the bases referred to in that letter. However, as this matter was not fully argued, I place no reliance on it for the purposes of this disposal.

[17] I have proceeded on the basis (conceded by Mr Ross) that a question of interpretation and application to the circumstances of the 1996 Act could give rise to a "dispute or difference as to the construction of this Contract or any matter or thing of whatsoever nature arising thereunder or in connection therewith" (or the similar wording in clause 39). I am not, however, to be taken as accepting that that concession was correctly made.

[18] For the reasons given I shall repel the defender's first plea-in-law (which seeks a sist for arbitration). Mr Ross further moved me, in the event of my doing so, to sustain the pursuers' second plea (a general plea to the relevancy of the defences) and to grant decree de plano. However, the hearing was appointed only on the plea relative to arbitration. It would be inappropriate to accede to Mr Ross's further motion without first giving to Mr d'Inverno an opportunity to consider the defender's position in light of my decision on the arbitration point.