Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2017] CSOH 23

 

P1039/16

OPINION OF LORD DOHERTY

In

ARBITRATION APPLICATION No. 2 OF 2016

for leave to appeal against an arbitration award on grounds of legal error in terms of

Rules 69 and 70 of the Scottish Arbitration Rules

 

Neither party was represented. Under rule 70(5) of the Scottish Arbitration Rules the application was determined without a hearing.

9 December 2016

Introduction
[1]        This is an application for leave to appeal against three parts of an award of an arbitrator.  The application is under the Arbitration (Scotland) Act 2010, the Scottish Arbitration Rules (“the Rules”), and Rule of Court 100.  The proposed appeal is a "legal error appeal" under Rule 69 of the Rules, on the grounds that the arbitrator erred on three points of Scots law.  The right to make a legal error appeal is constrained by Rule 70.  Such an appeal may be made only with the agreement of the parties or with leave of the court.  There has been no agreement of the parties in this case.  Leave of the court is therefore required.

 

The Arbitration
[2]        In 2008 the petitioner and the respondents entered into a contract in terms of which the respondents undertook to carry out certain construction works for the petitioner at the petitioner’s business premises.  In 2009 a series of disputes arose in relation to the parties’ rights and obligations under the contract.  Following two separate adjudications the parties submitted their dispute to arbitration.  The petitioner is the claimant in the arbitration.  The respondents to this petition are also the respondents in the arbitration.  After his appointment in December 2010 the arbitrator proceeded to conduct the arbitral proceedings.  Following a “Legal Issues Hearing” on 21 and 22 June 2011 the arbitrator issued a First Part Award on 27 July 2011 and a corrected First Part Award on 12 August 2011.  On 5 March 2012 the arbitrator issued a Second Part Award, which was replaced by a corrected Second Part Award on 23 March 2012.  On 17 July 2012 the arbitrator issued a Third Part Award.  Following a Diet of Proof during which evidence was heard on 19-23, 28-30 May, 2-6 and 9‑11 June 2014 the arbitrator considered written closing submissions and heard oral submissions on 2 September 2014.  He issued the Fourth Part Award initially on 4 August 2016, and replaced it with a corrected Fourth Part Award dated 1 October 2016.

 

The Aspects of the Fourth Part Award which the Petitioner Seeks to Challenge
[3]        The petitioner seeks to challenge parts of the Fourth Part Award on the ground of legal error.  It avers that the arbitrator erred in law in three different respects;  that as a result of the first error the award made in respect of waste disposal exceeded (by £183,737.50) the award which ought to have been made; that as a result of the second  error the award made in respect of payments for lagging was at least £400,000 greater than it ought to have been;  and that as a result of the third error the award made in respect of civil works exceeded (by £808,795.42) the award which ought to have been made.

 

Leave to Appeal
[4]        In terms of Rule 70(3), leave to make a legal error appeal may be given only if the court is satisfied:

"(a)      that deciding the point will substantially affect a party's rights;

 

(b)        that the tribunal was asked to decide the point; and

 

(c)        that, on the basis of the findings of fact in the award (including any facts which the tribunal treated as established for the purpose of deciding the point), the tribunal's decision on the point -

 

(i)         was obviously wrong, or

 

(ii)        where the court considers the point to be of general importance, is open to serious doubt."

 

 

The Challenge to the Award for Waste Disposal
[5]        The petitioner avers (paragraph 27.2 of the petition) that the arbitrator “plainly erred” in finding that the contract contained no fixed price for any element of the works and no effective brake on possible over‑expenditure by the contractor.  It maintains the correct contractual position was as summarised in paragraph 27.1 of the petition and that the arbitrator’s findings were “obviously contrary” to that.  By so concluding he also failed to give effect to the proper construction of Clause 52.1 and Appendix E.  Since the issue of the proper construction of Clause 52.1 concerns the interpretation of the NEC3 standard form the appeal is said to raise a point of general importance (paragraph 28 of the petition).  Had the arbitrator construed these provisions of the contact properly he ought to have concluded the heads of cost claimed by the respondents for waste disposal were either included within section 4 for civil works or, alternatively, fell to be included within the Fee (ie the heads of cost which are detailed in Appendix E).  Accordingly the respondents had no entitlement to be paid anything in respect of the head of claim.  In the reasons attached to its motion for leave the petitioner contends that this part of the arbitrator’s decision is obviously wrong.  Alternatively it submits that the appeal raises an issue of general importance concerning the construction of Clause 52.1 of the NEC3 standard terms and that the arbitrator’s decision relating to waste disposal is at least open to serious doubt.

[6]        In their grounds of opposition to leave to appeal being granted the respondents submit (i) that once the sum said to have been involved here (£183,737.50) is viewed in the context of the value of the whole dispute between the parties the proper conclusion is that the arbitrator’s decision on the point did not substantially affect a party’s rights;  (ii) that the arbitrator’s construction of the relevant provisions of the contract was correct, failing which it was at least a possible construction of the contract which was not obviously wrong;  (iii) that the point which the petitioner now makes in relation to Clause 52.1 was not one which the arbitrator was asked to decide;  (iv) that the arbitrator’s decision in relation to waste disposal does not raise a point of general importance, nor, in any case, is his decision open to serious doubt.

[7]        In terms of the Fourth Part Award the arbitrator found the petitioner liable to pay the respondents £1,307,442.31 together within interest of £258,266.85 calculated up to 21 July 2016 and at the rate of £106.95 per day thereafter until payment.  Even viewing the sum involved in this part of the claim in that context, it is sufficiently large to have substantial financial implications for the parties.  Deciding the point will substantially affect a party’s rights.

[8]        However, I am also satisfied that the petitioner’s submissions to the arbitrator anent the waste disposal claim did not include the contention that, on a proper construction of Clause 52.1 and Appendix E, costs for waste disposal which were not included within sections 4 or 10 (of Appendix E) were deemed to be included in the Fee.  That point of law was not fairly and squarely placed before the arbitrator (Safeway Stores Plc v Legal & General Insurance Society [2005] 1 P & CR 9). Since the arbitrator was not asked to decide that point the condition in Rule 70(3)(b) has not been met.

[9]        In any case the arbitrator’s construction of the contract, and his decision, appear to me to be arguably correct.  His conclusion that the costs claimed were not costs falling within section 4 is plausible.  For the petitioner to show that the arbitrator’s decision is obviously wrong involves the petitioner overcoming a stringent test.  I am very far from persuaded that such a finding can be made here.

[10]      Nor am I satisfied that the proposed appeal against the arbitrator’s decision raises a point of general importance.  The parties’ contract departed from the standard form NEC3 Option C in several significant respects, making it bespoke.  A decision on appeal in this would be unlikely to have wider resonance.  It would not be likely to be a decision of general importance.  In any case, I am not persuaded that the arbitrator’s decision is open to serious doubt.

 

The Challenge to the Award Reflecting Sums Paid for Lagging
[11]      The petitioner avers that the arbitrator erred in law in making the award which he did for lagging work in so far as the award exceeded £90,094.96.  The excess said to have been awarded was not less than £400,000.  £90,094.96 was the price for which subcontractors (“C”) had contracted to carry out lagging work in terms of a subcontract between C and the respondents.  The petitioner had approved that subcontract.  However, C had not carried out all of the work it had contracted to do.  The respondents claimed for the work C had done but also for the remainder of the lagging work which the respondents had performed themselves.  In so far as the total costs claimed for lagging work exceeded £90,094.96 the costs ought not to be recoverable.  On a proper construction of Clause 11.2 (23) “the amount of payments due to Subcontractors for work which is subcontracted” meant payments due in terms of the subcontract.  Given the existence of the subcontract no sum in excess of £90,094.96 ought to be recoverable as a Defined Cost whether that sum was claimed as an amount paid to C or as another cost incurred by the respondents to Provide the Works in terms of Clause 11(2)(13).  Otherwise the respondents would be effectively recovering twice for the same work.  The arbitrator’s error involved a misconstruction of Clause 11.2 (23).  The decision was obviously wrong.  If not obviously wrong, it was nonetheless open to serious doubt and raised a point of general importance.

[12]      The respondents contend that the sum said to be involved ‑ not less than £400,000 ‑ ought to be viewed in the context of the global value of the parties’ disputes;  and that if that is done it is clear that deciding this point would not substantially affect a party’s rights.

[13]      They maintain that in any case the arbitrator was correct to proceed on the basis that all of the sums spent by the respondents on lagging were required in order to Provide the Works in terms of Clause 11.2(13) and were part of the Defined Cost in terms of Clause 11.2(23).  None of the costs claimed were Disallowed Costs.  The arbitrator had not erred in construing the contract terms.  Besides, his decision was not obviously wrong.  The appeal does not raise a point of general importance.  The decision turned upon the particular circumstances in which C had been engaged.

[14]      I am satisfied that the sum involved in this part of the claim is sufficiently large ‑ even when viewed in the context of the total award made by the arbitrator in the Fourth Part Award ‑ that deciding the point will substantially affect a party's rights.

[15]      I am not satisfied that the petitioner has demonstrated that, on the basis of the facts which the arbitrator found, his decision was erroneous in law and obviously wrong.

[16]      Further, I am unconvinced that the proposed appeal on this point raises a point of general importance.  Rather, it appears to me that the decision turns on the rather unusual terms which the parties have agreed.  In any case, in my view the correctness of the arbitrator’s decision is not open to serious doubt.

[17]      I go further than that. In my opinion the arbitrator was correct to decide as he did.

[18]      It is instructive to recall the submissions which the petitioner made to the arbitrator in respect of this aspect of the award.  The essence of these were (i) that the respondents and C concluded a subcontract in terms of which C undertook to carry out insulation work for £90,094.96;  and (ii) that it followed:

“that in respect of the lagging works [the respondents are] entitled to the sum of £90,094.96 in terms of the approved subcontract. However, it also follows that the other costs of lagging which [the respondents] seek to recover do not properly fall within the definition of Defined Cost. Otherwise, [the respondents] are effectively recovering twice in respect of the same work.” (Closing Submissions 3.2.52)

 

[19]      The arbitrator concluded that on a proper construction of the contract between the petitioner and the respondents it did not provide that the necessary lagging work was to be done by the respondents for a fixed price.  I do not understand the petitioner’s Closing Submissions to the arbitrator to have maintained otherwise.  In any case, I am in no doubt that the arbitrator’s conclusion in that regard was correct.  Construing the language of the contact in its documentary, factual and commercial context there is simply no basis for concluding that the contract provided that the respondents would do the lagging work for a fixed price.

[20]      Had the contract included a target contract price and the risk sharing provisions normally included in NEC3 Option C target contracts, the risk of the works costing more than parties expected would have been shared between the parties.  Here the contract omitted those features with the consequence that the risk was carried by the petitioner.  That may have resulted in it being a bad bargain so far as the petitioner’s interests were concerned, but that is beside the point.  The terms and effect of the contract are clear.

[21]      The arbitrator accepted that the lagging work which the respondents claimed payment for ‑ both the work done by C and the other work done by the respondents themselves ‑ was all work which was necessary to complete the works.  I do not understand it to have been contended otherwise by the petitioner.  It was not suggested that any of the work done by C which was claimed for was duplicated by the other work done by the respondents which was claimed for.  Nor did the petitioner contend that there was Disallowed Cost within the meaning of Clause 11.2(25) which required to be deducted (in terms of Clause 11.2(23)) from the cost of the work done by the respondents themselves.  Rather, the argument seemed to be that since C had bound itself to the respondents to carry out the lagging work for a price of £90,094.96 that sum was a cap on what the respondents could recover from the petitioner for lagging work.  Thus, so the argument ran, any sum in excess of that figure could not be recoverable as Defined Cost, even though it otherwise satisfied the requirements for being Defined Cost, because otherwise the respondents would be “effectively recovering twice in respect of the same work”.

[21]      In my view the argument which was advanced to the arbitrator by the petitioner was plainly untenable and he was right to reject it.  The respondents had not contracted with the petitioner to do the lagging work for a fixed price of £90,094.96 (or indeed for any fixed price).  They had an obligation to carry out lagging work but they were not bound to the petitioner to use C or any other subcontractors.  Whether they chose to use C to carry out the work in whole or in part, or carried it out themselves in whole or in part, was up to them.  In terms of the contract they were entitled to carry out the lagging work and to be paid on the basis of the Defined Cost.  In so far as they used C their claim would be for the payments due to C for the work it did.  In so far as they did lagging work themselves their entitlement was to the cost of that other work.  The premise of the petitioner’s argument ‑ that the respondents were bound to ensure that C carried out the lagging work for a price of £90,094.96 (or, failing which, that any relevant claim which the respondents had for the cost of the work carried out by them or C was capped at £90,094.96) ‑ is simply ill-founded.  There is no intelligible legal basis for it (and no intelligible legal basis for it was advanced to the arbitrator).  Moreover, the contention that the respondents “were effectively recovering twice for the same work” is obviously fallacious.

 

The Third Suggested Error of Law
[22]      The petitioner contends that the arbitrator erred in law in making the award for section 4 Civil Works which he made.  The legal error is said to have been that the arbitrator’s finding was not supported by the evidence, and was in fact contradicted by it.  As I understand the criticism it is that the arbitrator erred (i) in accepting the valuation evidence of Mr S on this aspect of the dispute because it lacked “any contemporaneous factual basis”;  and (ii) in disregarding the valuation of £506,741 which had been agreed between the parties’ representatives in respect of the December 2008 application for payment.  The financial consequence of this error of law is said to be £808,795.42.

[23]      The respondents do not accept that there was any error of law on the part of the arbitrator.  The respondents’ position before the arbitrator was that the claim had to be built up from nil rather than from any figure previously agreed for the purposes of amounts claimed or paid in the interim applications.  Mr S gave evidence as to how that ought to be done.  With minor modifications the arbitrator accepted Mr S’s approach.  He was entitled to do so.  It could not be said that he fell into any legal error which resulted in his decision being obviously wrong.  Further, the petitioner had not suggested to the arbitrator that it was not legally open to him to adopt the approach which Mr S spoke to.  The petitioner had not asked the arbitrator to decide the point which was now being advanced.

[24]      I am satisfied that the petitioner did not contend before the arbitrator that it was not legally open to him to accept Mr S’s approach.  It follows that the arbitrator was not asked to decide the point which the petitioner now advances.  The requirement in Rule 70(3)(b) is not satisfied.

[25]      I am also satisfied that this challenge is essentially a challenge to the basis of the findings in fact in the award rather than a true legal error appeal falling within the ambit of Rule 69.

[26]      In any case I am not satisfied that this aspect of the arbitrator’s decision is vitiated by any error of law which results in the decision being obviously wrong.  It was open to the arbitrator on the evidence before him to accept Mr S’s valuation approach.  I do not accept that he was legally bound to reject that evidence and to prefer the approach contended for by the petitioner.  Neither Mr S nor the arbitrator was constrained to proceed on the basis of the valuation which had been agreed for the purposes of the December 2008 application.

 

Disposal
[27]      Leave to appeal is refused.