Overruling of Crouch

Czech Republic

To the average client, the impunity with which judges can make mistakes without being held to account for them is one of the unexplained mysteries of the litigation process.

What is even harder to explain is how a decision of the Court of Appeal which was a bombshell at the time and has been vilified ever since should take 14 years to overturn. This is what has just happened to the decision in Northern Regional Health Authority v Derek Crouch Construction Co Ltd. It has taken that long for a litigant to fund an appeal, from the Northern Ireland legal system, to the House of Lords. Part of the explanation must lie in the adroitness with which the English and Welsh Official Referees have paid lip service to Crouch without actually imposing it.

In the Crouch case there was a complicated multi-party dispute. The employer wanted all related disputes decided in the one forum, by litigation. A sub-contractor wanted its part of the dispute decided by an arbitrator. The main contractor had agreed (via a name-borrowing procedure) to obtain for the sub-contractor benefits under the main contract. Both main contract and sub-contract contained arbitration clauses. In those days (prior to the Arbitration Act 1996) arbitration clauses could be overridden if the court were satisfied, as it often would be in a multi-party dispute, that justice demanded the imposition by the court of its rules as to joinder. The lack of any satisfactory means of compelling parties to submit to joint arbitration proceedings remains a reason for doubting that arbitrators can dispense full justice.

The sub-contractor in Crouch put forward the counter-argument that it could never obtain justice in front of a court, because the JCT scheme of contracts allowed an arbitrator to open up, review and revise the decisions or certificates of the architect but (and this was the crucial argument) did not permit a judge to do so. Therefore, the argument went, if the sub-contractorís claims would be stymied by existing certificates or opinions of the architect, they would only receive fair treatment at the hands of the arbitrator.

The Court of Appeal accepted this argument. There has always been the suspicion that it did so partly in order to relieve pressure on the Official Refereesí lists, which were very congested at the time.

Crouch was not only about analysing the words used in JCT arbitration clauses. Underlying it were at least two assumptions: (a) that the courtsí powers were limited in any event and/or could be limited by the terms of contracts; and (b) that architectsí certificates or decisions, once they bound the parties, did so for all time unless or until they were overridden by a mechanism - in this case arbitration - agreed by the parties.

The assumption that the courtsí powers were or could be limited was also behind the legislatureís attempt, by s.100 Courts and Legal Services Act 1990, to overcome the decision in Crouch. This (in what is now s.43A Supreme Court Act 1981) gave parties to an arbitration agreement power to bestow upon judges the same specific powers as the arbitration clause conferred upon the arbitrator. Two obvious restrictions in s.43A were (1) that it depended on the partiesí consent and (2) that it did not apply unless there was an arbitration clause. Certain dicta in Crouch had suggested that the courts simply had no power to revise decisions of an architect, whether or not there was an arbitration clause, in other words that the courts had only a limited range of inherent powers. One commentator asked at the time, by way of analogy, whether, if the parties drafted a clause to this effect, a judge would be able to give judgement for a certain quantity of pineapples, as opposed to a certain sum of money.

The House of Lords has now declared, in Beaufort Developments (NI) Limited v Gilbert Ash NI Limited, that Crouch was wrong and may be ignored. The leading opinion was Lord Hoffmann. In consigning the 14 year old rule to the dustbin, he addressed a number of arguments which will be of general interest.

However, in one sense, the decision has come too late. For disputes which are subject to the Arbitration Act 1996, the courts will have no discretion to override arbitration clauses even if, in the case of multi-party disputes, justice demands this. There will no doubt be cases where parties to arbitration agreements allow litigation to proceed without either of them applying for a stay. Given the effect of s.9 Arbitration Act 1996, which allows parties to insist on arbitration where the other party seeks to litigate, the effect of Crouch would in any event have been greatly diminished.

Lord Hoffmann indicated that parties to an arbitration agreement are free to stipulate both that architectís certificates and decisions should be binding until overturned and that a court should not have the same powers as an arbitrator to overturn them. The effect would, in appropriate cases, be to make an arbitrator the only person who could decide a dispute on its merits - subject no doubt to appeals to the court on questions of law. To this extent, the decision in Beaufort may encourage parties to draft arbitration clauses so as to include provisions to oust the ordinary jurisdiction of the courts. Those drafting contracts should be much more circumspect than before and pay greater attention not only to the principle of having an arbitration clause at all but also to the way in which arbitratorsí powers are expressed.

It should be stressed that existing standard form arbitration clauses do not generally achieve the result of giving finality to any decisions of architects. Following Beaufort the assumption underlying such clauses is that the court can determine the rights of the parties.

The principal error in Crouch was held to be in the Court of Appealís view that architectsí decisions were binding. There are two types of 'binding' decision. In one sense, architectsí decisions are binding because they apply temporarily: for instance non-payment of an interim payment certificate will, in the absence of good reason, be a breach of contract. Under the Construction Act 1996, adjudicatorsí decisions must have at least this temporary effect.

Just as parties can, under s.108(3) Construction Act 1996, agree to accept adjudicatorsí decisions as finally determining a dispute, Lord Hoffmann sees nothing wrong or contrary to public policy in parties agreeing to treat architectsí certificates as final and binding. The question is therefore not whether certificates are binding, but whether they are final and binding. Except for final certificates under JCT contracts, Lord Hoffmann concluded that the architectís decisions were not.

The second point to note is that Lord Hoffmann described the JCT conditions as a framework of carefully defined contractual obligations (as to time, money and workmanship) which it was not easy to reconcile with the notion of any third party having a broad discretion to vary or modify them. He accepted that within that framework there was room for judgement but that the exercise (by the architect or whomever) of such judgement could not be viewed as a power to modify the contractual rights.

In the key part of the opinion, Lord Hoffmann says

'These are questions which require the application of objective standards and with which the courts are routinely familiar.'

The implication is that judges who second guess the decisions of architects by, in effect, doing what they think the architect should have done are simply doing the same type of thing as if they were deciding whether a contract or other legal obligation had been breached and, if so, the financial consequences of that breach.

Insofar as architects determine sums due either as the proper value of work done or as loss and expense payable under JCT contracts, Lord Hoffmann is clearly right: common law rules of interpretation, causation and quantification of damages can be applied to claims for financial relief.

A look at the leading textbooks on how architects should approach extension of time claims in cases of concurrent delay suggests that there is no analogous body of case law on this topic. Should judges award extensions of time using the same notions of causation as would apply to claims for damages for delay? If so, this is likely to be to the disadvantage of contractors guilty of their own concurrent delay. Or should artificial notions of causation be adopted instead, on the basis that the onus is on the employer to prove that the contractor could have finished earlier than he did and that any extension of time should disregard the concurrent delay? The latter is what Keating suggests but without any support from judicial precedent.

Given that Beaufort is simply returning us to the pre 1984 position but with a new breed of Official Referees many of whom were actively litigating construction disputes in that period, it probably does not pay to nit pick over the intricacies of the decision but rather to welcome it as removing an unnecessary layer of complication from the resolution of disputes.

For more
information please contact:

Neil Aitken or Charles Spragge in the International Arbitration Group, Cameron McKenna. Tel: 44 171 367 3000, Fax 44 171 367 2000 or by e-mail to nca@cms-cmck.com or to chs@cms-cmck.com