Arbitration - a recent decision from the House of Lords

United Kingdom

The Court of Appeal Decision

In April 1997 the Court of Appeal in Northern Ireland upheld an order for a stay of litigation commenced by the Developer - Beaufort Developments NI Ltd - against the Contractor - Gilbert Ash NI Ltd - because there was an arbitration agreement in their contract (which was JCT 1980 edition). The Contractor had argued that it would be at a "grave disadvantage" in any litigation because the Court would not be able to review any architect's certificates, whereas an arbitrator did have the power to "open up, review and revise" certificates and opinions.

As everybody knows, the decision of the English Court of Appeal in Northern Regional Health Authority -v- Derek Crouch Construction Co. Ltd (1984) Q.B. 644 ("Crouch") held that the power to "open up review and revise any certificate" was available to an arbitrator appointed to decide a dispute under a building contract in the JCT Standard Form which is not available to a Court. The Northern Irish Court of Appeal considered itself bound by this English authority.

The House of Lords Decision

The Contractor took the matter to the House of Lords and invited their Lordships to say that Crouch was wrongly decided. On 20 May 1998 their Lordships did just that.

The Crouch decision has long been criticised. In effect what the Crouch case said was that the power to open up, review and revise was a special power conferred exclusively upon the arbitrator. The jurisdiction of the Court was limited to deciding whether or not the certificate or opinion was invalid for bad faith or excess of power. The Court could not revise the certificate on the ground simply that it thought it was wrong.

The House of Lords has overturned Crouch unanimously. The reasons for their decision are set out most fully in the robust judgment of Lord Hoffmann. His judgment contains the following comments:

  • The arbitrator does not "modify" the parties contractual obligations (as asserted in Crouch). The correct approach is to say that the parties have agreed that their contractual obligations are to be whatever the architect or arbitrator interprets them to be.
  • The architect does not have an inherent power to issue binding certificates which can only be reviewed by an arbitrator who has been given the power to "open up, review and revise". Clause 30.9 of the JCT contract makes the Final Certificate conclusive evidence as to various matters, but there is no other express provision which says that any other certificate or expression of opinion is to be binding on the parties.
  • Certificates have "provisional validity"; they are the machinery by which the rights and duties of the parties at any given moment are provisionally determined with some precision.
  • The architect is a professional man "but can hardly be called independent".
  • A JCT contract is concerned with the construction of a building out of specified materials in a workmanlike manner and provides that the work should proceed regularly and diligently to completion by a specified date. There is room for judgment about what amounts to proper workmanship and diligent progress. These are questions which require the application of objective standards and with which the Courts are routinely familiar.
  • The Court of Appeal's decision in Balfour Beatty Civil Engineering Ltd -v- Docklands Light Railway Ltd (1996) 78 B.L.R. 42 is disapproved.

The approach adopted by the House of Lords is summed up succinctly by Lord Hope of Craighead. He comments that "it is not to be thought that by conferring powers on the arbitrator the parties are limiting the ordinary powers of the Court to determine their rights and obligations under the contract". The Court, unlike the arbitrator, does not need to make use of the machinery under the contract to provide the parties with appropriate remedies because it already has all the powers which it needs in regard to the examination of the facts and the awarding of sums found due to or by either party.

The significance of the Decision

The significance of the decision to the parties in this case is that the stay on the litigation will not be lifted, on the basis that, were it not for the binding effect of Crouch, the lower Courts would have exercised their discretion to allow the dispute to remain in Court so that other parties (in particular the architect) could be joined to the proceedings and thereby a multiplicity of proceedings would be avoided.

The significance of the case generally, in respect of stays to arbitration, will be minimal. S. 9(4) of the Arbitration Act 1996 has removed the Court's discretion in respect of an application for a stay if there is a valid arbitration clause: a stay must be given. So unless s. 86 of the Arbitration Act is brought into operation (which gives the Court the appropriate discretion in the case of domestic arbitrations) this decision will give no assistance.