UK: Norton Rose Newsflash - Crouch Overruled

Last Updated: 25 June 1998
Beauforts Developments V Gilbert-Ash

Overturning a previous Court of Appeal decision to the contrary, the House of Lords has held that the court does have the power to open up the certificates and decisions of a contract administrator under a building contract. It is not necessary expressly to confer this power on the court nor does giving an arbitrator this power detract from the court's power. As a result one of the major disadvantages of litigation over arbitration has been removed. The court also enjoys the power of joinder of actions, unavailable to an arbitrator without consent of the parties, which tips the balance strongly in favour of the courts as the forum for the resolution of construction disputes.

On 20 May 1998 the House of Lords gave judgment in the case of Beaufort Developments v Gilbert-Ash. Their Lordships concluded that the Court of Appeal decision in the Crouch (see end note 1) case (a decision well known, if not loved, by construction lawyers) was wrongly decided and overruled it.

CROUCH

Construction contracts usually provide for important issues between the contractor and the employer to be decided by a contract administrator (often the architect or engineer): for example the certification of payments to the contractor or the determination of the contractor's entitlement to an extension of time in certain circumstances. In Crouch the Court of Appeal considered JCT wording (from the JCT 1963 contract) which provided for certification by an architect and contained an arbitration clause empowering the arbitrator "to open up, review and revise any certificate, opinion, decision, requirement or notice and to determine all matters in dispute which should be submitted to him in the same manner as if no such certificate, opinion, decision, requirement or notice had been given."

The Court of Appeal held that the arbitrator had the power to open up certificates etc. but that the court did not. The court could only declare a certificate to be inoperative where, for example, the architect had acted in bad faith, in excess of his authority or had made an error of law. Finding that the court had no jurisdiction to review a decision of the contract administrator became known as being "Crouched". The Crouch decision was much criticised over the years. Judges in lower courts have, on occasion, gone to great lengths to get round it. The decision was nevertheless an important and, until 20 May, binding authority.

THE FACTS

Beaufort Developments entered into a building contract with Gilbert-Ash in JCT standard form (JCT 80). By a separate agreement, they appointed an architect as contract administrator. The works were not completed on time; the contractor blamed the architect and the employer blamed them both. The contractor claimed that it was entitled to payment from the employer. The employer claimed it was entitled to damages from the contractor and the architect for breach of contract. Court proceedings and arbitration proceedings were commenced. The employer risked conflicting decisions between court proceedings with the architect and arbitration with the contractor, so wanted all disputes dealt with in court. The contractor, according to Crouch, had to go to arbitration to have the architect's interim payment certificates opened up. The contractor applied to the court for a stay of the court proceedings pending the outcome of the arbitration. The matter came before the Court of Appeal, who criticised the Crouch decision but nevertheless felt obliged to follow it, and was then appealed to the House of Lords.

THE CASE

The question for the House of Lords to decide was whether an arbitrator under a building contract in the JCT standard form had a power to review decisions and certificates of the architect which was not available to the court (and whether the Crouch decision was therefore correct).
The House of Lords held that there are two principles at work:

  • the court must give effect to the contract which the parties have made for themselves; it cannot modify that contract;
  • on the other hand, clear, unequivocal words are needed in a contract before a party can be deprived of recourse to the court.

Their Lordships concluded that it is possible for parties to enter into a contract which provides that the parties' contractual obligations are whatever a third party interprets them to be. Such provisions are common in contracts for the sale of property or goods, where the contract may say that the value of property is whatever an expert determines. The same could be true if a building contract provided that an architect or arbitrator's decision was conclusive as to the matter in question. In such cases, the court's opinion would not be relevant; the court would simply enforce the contract which the parties had entered into.

However, in the present JCT contract, only the final certificate was stated to be conclusive as to various matters. No final certificate had been issued here. There was nothing to make other certificates conclusive. Their Lordships concluded that, other than the final certificate, certificates and decisions of the architect only have "provisional validity". It is necessary to have a mechanism in a building or engineering contract for the provisional determination of rights and obligations, for example in relation to interim payments or the date for completion of the works; the parties need to know where they stand at any given time. However, a JCT contract does not make such certificates and decisions finally conclusive and it would take very clear words in a contract to do this.

Is It Necessary To Give The Court The Power To "Open Up"? No.

While the court cannot exercise the machinery of the contract as if it were an architect or arbitrator (i.e. it cannot issue certificates itself), it does not need to do this. Subject to the principles above, the court can exercise its ordinary powers to decide issues of fact and law which are brought before it and give effect to the rights and obligations of the parties to the contract. The power to "open up" certificates and determine matters in dispute is not a special power conferred exclusively upon an arbitrator.

Does Giving An Arbitrator This Power Preclude The Court From Exercising It? No.

It is necessary to spell out in a contract the powers of an arbitrator because, the court said, an arbitrator derives his jurisdiction from the contract. However, simply conferring powers on an arbitrator does not mean that the parties limit the powers of the court.

The Outcome

Now that it was clear that a court could open up certificates and opinions of the architect, there was no need for the contractor to take his dispute to arbitration; the whole matter could be dealt with by a court thus avoiding the risk of conflicting decisions in court and arbitration proceedings. Accordingly, the House of Lords refused to stay the court proceedings.

Incidentally, readers should note that, if asked to stay court proceedings in this way now, a court would be bound by the Arbitration Act 1996; the Act now severely limits the court's power to grant a stay where the parties have included an arbitration clause in their contract. As the law stands at present, a stay would almost certainly not have been granted.

The above is simply a summary of the House of Lords' decision. The decision raises several issues in relation to the status of interim and other certificates, the way the case would be dealt with today and what is left of the long line of decisions which followed Crouch? In addition, it adds to the current debate as to arbitration (rather than litigation) as a forum for dispute resolution. We shall consider the decision in more detail in the next edition of our publication Construction Notes. If you do not already receive this publication, or do but would like more copies, please let us know.

This Briefing is intended only as an outline of the main legal considerations. It does not try to cover every detail and should not be used as a substitute for professional advice on the circumstances of any individual case. Norton Rose takes no responsibility for the contents of this document. Readers who require any further advice should in the first instance contact one of the persons listed below.

Endnote

1 Northern Regional Health Authority v Derek Crouch Construction Co. Ltd. [1984] Q.B. 644

This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

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