Case number:HT-03-363

Neutral Citation No: [2004] EWHC 8 (TCC)
In The High Court of Justice
Queen’s Bench Division
Technology and Construction Court

Date:16 January 2004

Before: 
His Honour Judge Thornton QC
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Between:

Hallamshire Construction PLC
Claimant
and

South Holland District Council
Defendant

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This judgment was made in writing and was handed down by the court. For the purposes of paragraph 5.12 of 52PD-19 (Practice Direction - Appeals), this written judgment is to be taken as replacing an official recording and approved transcript of the judgment.
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Representation
Mr Nicholas Dennys QC appeared for the claimant instructed by Browne Jacobson, 44 Castle Gate, Nottingham NG1 7BJ, DX: 718130 Nottingham 27 (Ref: RDEAO1/STHWO1/JMW/0283230001)

Mr Mark Raeside QC appeared for the defendant instructed by Hannah & Mould, 3 Grosvenor Gardens, London SW1W OBD (Ref: TM)

Date of hearing:10 December 2003
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JUDGMENT
JUDGMENT

Subject matter

Appeal on a question of law from an award of an arbitrator in a dispute arising out of a JCT form of contract. The appeal concerned these questions: whether an Architect’s Instruction issued under the contract had contractual effect; the meaning of the phrase “all costs in connection with this variation to be agreed by [the quantity surveyor]”; and as to whether this process of agreement involved the identification of an offer relating to the entirety of the works which had been accepted or whether agreement could be achieved by piecemeal agreement of bill items.

Decision

The arbitrator correctly concluded that the AI in question had contractual effect and that the process of agreement it provided for was not of the kind involved when a new contract is being negotiated and finalised but was of the piecemeal kind required by the contractual procedures for ordering variations and pricing them.

This judgment was made in writing and was handed down by the court. For the purposes of paragraph 5.12 of 52PD-19 (Practice Direction - Appeals), this written judgment is to be taken as replacing an official recording and approved transcript of the judgment.

1.	Introduction

1.		This judgment is concerned with an appeal from an arbitrator in a construction arbitration. The claimant, the main contractor, has appealed one question of law arising out of the first award of Mr A Canham which was originally published on 20 September 2003 and was finally published, following its correction under section 57(3)(a) of the Arbitration Act 1996, on 7 October 2003. The defendant is the employer, a local authority.

2.		The award related to disputes arising out of the building contract between the parties that incorporated the 1980 local authorities with quantities JCT form of building contract including amendments 1, 2 and 4 - 15 inclusive. This standard form incorporated clause 41.6 which provides that the parties to the contract agree and consent pursuant to sections 1(3) (a) and 2 (1) (b) of the Arbitration Act 1979 that either party may appeal to the High Court any question of law arising out of an award made in an arbitration under the Arbitration Agreement constituted by clause 41 and the parties agree that the High Court shall have jurisdiction to determine any such question of law. The effect of this provision was to obviate the need for either party to obtain the leave of the High Court to bring an appeal on a question of law arising out of an award. The 1979 Act has been repealed and re-enacted for present purposes in substantially the same terms in the Arbitration Act 1996 and it has been held on several previous occasions,1 and the parties accept, that clause 41 is sufficient to obviate the need for either party to obtain leave or permission to appeal any question of law. The parties must, of course, identify and raise a question of law and may not use section 69(2)(a) of the Act to raise an appeal on a question of fact.

3.		The underlying building contract was entered into under seal and was dated 11 June 1997. This contract required the claimant to carry out the first phase of the remodelling and refurbishment of the South Holland Centre, in Spalding, Lincolnshire for a contract sum of approximately £1,037,000. The work was carried out and the claimant was delayed and disrupted. The resulting claims were the subject of negotiation between the claimant and the architects named in the contract, Sansone Hall and the quantity surveyors also named, Jackson Coles. Meanwhile, the defendant was wishing to press ahead with phase 2 of the project concerned with the fitting-out works. Drawings and bills of quantities were prepared and tender documents were sent to the

1	The cases, in chronological order, are: How Engineering & Services Ltd v Lindner Ceiling and Floors plc, unreported, 17 May 1995, Judge Thornton QC; Panatown Ltd v Alfred McAlpine Ltd 58 Con LR 46, Judge Thornton QC; Vatcroft (Contractors) Ltd v Seeboard plc 78 BLR 138, Judge LLoyd QC; Taylor Woodrow Civil Engineering Ltd v Hutchinson Development Ltd (1999) ADRLJ 83, Clarke J; Fence Gate Limited v MEL Construction Limited 62 Con LR 41, Judge Thornton QC, Robin Ellis Ltd v Vinexsa International Ltd [2003] EWHC 1352 TCC 13 June 2003, Judge Thornton QC and Cantrell v Wright & Fuller Ltd [2003] EWHC 1545 (TCC), 90 ConLR.

claimant who returned priced bills of quantities to Jackson Coles. The total cost was unacceptable to the defendant. In consequence, the claimant and the consultants started an exercise of revision of the bills of quantities to produce reduced costs. This exercise involved, so the arbitrator found, removing certain items of work from the bills, downgrading the specification in certain respects, reducing some of the prices and correcting errors within the bills.

4.		The negotiated process of revising the individual sections of the bills of quantities was still continuing in July 1997 when the defendant wished the phase 2 work to start. The parties then negotiated the basis upon which work was to start. The phase 2 work would be added to the existing contract by means of a variation issued under that contract. The process of negotiation involved in revising the claimant’s phase 2 tender would continue and the revised work scope and cost would be agreed by Jackson Coles. This arrangement would be given effect to by Sansone Hall issuing a variation instruction under the contract, which the claimant would immediately implement whilst the cost negotiations continued, with a revised completion date being agreed as 30 November 1997. Finally, the claimant’s disputed claims for remuneration for delay and disruption for phase 1 were agreed in a full and final settlement.

5.		This agreed way of proceeding was given effect to in an instruction, AI 51, dated 16 July 1997. The terms of this instruction are material to the question of law argued on this appeal and they read as follows:

		“Draft Interim for Phase 2 Variation:

Please complete the Phase 2 Fit Out Works for this contract in accordance with the following documentation currently being prepared for imminent issue:

1	Bills of Quantities previously prepared by Jackson Coles and priced be Hallamshire Construction and now being revised to produce reduced costs.

2	Drawings and Specifications previously prepared by Sansone Hall Architects, WS Atkins, Malcolm Chard Associates and Sandy Brown Associates and now being revised to reflect the amended items of the Bills of Quantities.

All Terms and Conditions to be as existing Contract dated 11 June 1997 between South Holland District Council and Hallamshire Construction with the following exceptions:

		1.	Contract Completion Date to be revised to Sunday 30 November 1997.

		2.	Contractors compound to be removed and Double Street to reopen on 31 October 1997.

		(Note: Road alignment works to Double Street to be the subject of a separate variation)

Jackson Coles have agreed a full and final settlement of any and all claims in connection with prolongation/disruption, etc, up to and including the date of this Instruction and the Contractor has agreed that no further claims will be made in connection with the items previously noted as being responsible for delay in the Contractor’s Progress Reports tabled at the monthly Project Meetings.

All costs in connection with this variation to be agreed at fair and reasonable costs by Jackson Coles.”

6.		The continuing negotiations were undertaken by Mr Turner who is a quantity surveyor employed by the claimant and Mr Love who is a quantity surveyor member of Jackson Coles. Mr Love prepared a fresh set of unpriced bills of quantities incorporating the revisions to the work items and quantities agreed up to that time with the claimant. By the time that that revised documentation had been prepared, some rates and prices had been provided by Mr Turner to Mr Love which he had agreed. Strictly speaking, the agreement related to the manner in which the relevant originally tendered rates would be revised and was not an agreement for completely new rates. Other rates and prices remained for agreed revision.

7.		The revised documentation was sent to the claimant with no rates and prices inserted in it. Mr Turner inserted rates and prices into the blank bills of quantities and these priced bills were returned to the defendant on 7 August 1997. These showed a summary total as £1,208,191.13 arid provided for an overhead and profit recovery of 7.5 per cent. These priced bills of quantities were called Bill A by the arbitrator in his award.

8.		A meeting on 11 August 1997 and various telephone conversations occurred when a number of amendments to the rates and prices submitted by the claimant were agreed by Mr Love and either Mr Turner or one of his colleagues or various representatives of specialist suppliers and subcontractors. These amendments together with certain corrections of errors and a number of further amendments made unilaterally by Mr Love were all incorporated into a fresh revised set of priced bills of quantities which Mr Love prepared and sent to the claimant in November 1997. These revised priced bills of quantities were called Bill B by the arbitrator in his award. No further negotiations occurred. The arbitrator made this finding as to the contents of the revised priced bills of quantities:

“the rates and prices in Bill A that were not changed in Bill B were agreed by offer and acceptance ... the rates and prices, other than mark up, in Bill B that are different to those in Bill A, by revision of Bill A, were agreed orally by negotiation in August 1997 and at the latest in November by conduct thereafter.”

9.		The mark up of 7.5 per cent in Bill A was never made the subject of negotiation. The mark up in Bill A of 7.5 per cent was reduced in Bill B to 5 per cent. The arbitrator found that Mr Love was fully aware that the claimant would only accept 7.5 per cent as a minimum. However, no agreement was reached as to the mark up until, long after work was completed, Jackson Coles submitted the final account to the claimant which contained a mark up of 7.5 per cent, this as the arbitrator found constituted an acceptance by Mr Love that the appropriate mark up should be 7.5 per cent. The arbitrator’s finding is as follows:

“the percentage mark up for overheads and profit was agreed, by offer and acceptance, on receipt by the claimant of a copy of the Final Account in November/December 1999.”

10.	The overall findings made by the arbitrator are contained in his award and are as follows:

		“I hereby award and declare that:

		1	The rates and prices in Bill A that were not revised in Bill B were agreed by the parties on the basis of offer and acceptance. They were agreed orally in August 1997 or at the latest in November 1997 when evidence of their inclusion in Bill B was communicated to the claimant by provision of typed Bill B.

2	Those rates and prices in Bill B that were different to those in Bill A, by revision of Bill A, were agreed by involvement an negotiation in August 1997 and at the latest in November 1997 by conduct thereafter.

		3	The parties agreed to the percentage addition for overheads and profit to the rates and prices in Bill B, by offer in August 1997, and acceptance on a date in November or December 1999, upon receipt by the claimant of the Final Account showing the adjustments to uplift that percentage.”

2.	The appeal

11.	The claimant’s grounds of appeal and the question of law they raise can best be seen from a consideration of its case before the arbitrator. This is because this appeal, like many construction arbitration appeals, is subject to an arbitration agreement which provides the agreement of both parties to the arbitration for either party to bring an appeal on any question of law arising out of an award without the need for the appellant party to use the statutory appeal filter or to obtain the permission of the court to bring that appeal. In consequence, the question of law has not, as is frequently the case in such appeals, been defined with any precision.

12.	The claimant contended in bringing its claim in the arbitration, that the phase 2 work had been undertaken without any contract for that work ever being entered into. The effect of the variation order, AI 51, issued by Sansone Hall on 16 July 1997 was to set up a tendering process whereby the parties would attempt to agree a concluded contract for the phase 2 works but, unless and until that subsequent contract came into being, the AI itself had no contractual effect. The parties could only achieve a contract for the phase 2 work if such came into being by virtue of the usual contractual formation mechanisms recognised by English law, namely by means of the unqualified acceptance of an offer covering a contract all of whose terms were set out in or identified by the offer. AI 51 was not such an offer since it did not identify the principal term of a construction contract, the price for the work. All AI 51 did was to provide a mechanism or structure for the process of agreement of the price. It was, in reality, no more than an agreement by the parties that they would subsequently agree a contract, an agreement which is not recognised as contractually enforceable in English law.

13.	Thus, the work was carried out without any contractual obligation and, in consequence, was to be remunerated on a restitutionary basis, being a basis grounded in the actual reasonable cost of performing the work in the working conditions actually encountered. No contract could have come into being unless the entirety of the work and the contractual remuneration for that work had been the subject of an offer which had been accepted. It would not have been possible for the parties to negotiate and agree contract rates for bill items piecemeal. It was necessary for a complete and priced set of bills to have been the subject of one overall clearcut agreement by duly authorised agents of both parties. It is clear, as can be seen from the factual background that I have summarised from the findings of the arbitrator, that no such clearcut and entire agreement of the priced bills of quantities ever occurred.

14.	The defendant’s case was very different. It contended that AI 51 took effect as an instruction for a variation issued under the original contract so that the work provided for, being the phase 2 work, constituted extra or additional work to be performed under that contract. The unusual nature of that AI, in terms of the unusually large scope of work it instructed and of the procedure for agreeing the price of the varied work, had been the subject of negotiation and the terms of the AI had been agreed by the parties prior to its issue so that the parties had accepted that AI 51 was to be treated as a validly issued instruction under the construction contract whose terms had contractual effect.

15.	Thus, on issue, the phase 2 work was being undertaken pursuant to that contract and the remuneration to be paid was that defined by the AI set against the underlying contract. That AI provided that the scope of work was defined in the bills and drawings already issued and priced but that that workscope would be subject to further variation following the on-going negotiations between the claimant and Jackson Coles. In so far as those parties reached agreement as to individual work items and their prices, those prices would prevail. To the extent, if any, that prices remained unagreed, the parties would need to fall back on the contractual machinery provided for by the contract as amended by the AI and such remuneration would be settled unilaterally by Sansone Hall as the contractual certifying body with, in the event of disagreement, the right of either party to have recourse to an arbitrator appointed under the arbitration clause.

16.	The arbitrator, therefore, had to decide the following questions: (1) Was the phase 2 work subject to a contract as soon as AI 51 was issued? If not, was a contract subsequently agreed for the phase 2 work and, if so, what were the terms of that agreement? (2) If AI 51 had contractual effect so as to make the phase 2 work subject to the original contract, what was the scope of the phase 2 work and, on a proper construction of the terms of AI 51, what was the basis of the claimant’s remuneration and how was this to be agreed? (3) Was the claimant’s remuneration for the work ever finally agreed by the parties and, if so, what were terms of that agreement?

17.	The claimant was, in summary, contending that Al 51 provided no contractual basis for the phase 2 work and had no contractual effect. No contract was ever agreed so that it was now entitled to be paid on a restitutionary cost plus basis. However, even if AI 51 did have contractual effect, the claimant’s basis of remuneration was still a cost plus basis. This was because no negotiated agreement that had been arrived because the defendant had not followed the cost agreement procedure provided for and required by the terms of AI 51 with the consequence that the claimant was now entitled to be remunerated in accordance with the provisions of AI 51. These provisions provided for a cost plus basis of remuneration.

18.	The defendant was, in summary, contending that AI 51 had contractual effect, that it provided for costs to be agreed by Jackson Coles and that those costs had been agreed both in fact and on a basis provided for by AI 51 that had followed a process of negotiation also provided for by AI 51.

19.	The arbitrator found for the defendant on each step of its contention. In summary, he concluded that AI 51 had contractual effect. Furthermore, AI provided a contractual mechanism for finalising the scope of work and the contractual price for that work. This mechanism envisaged a negotiated finalisation of both work scope and remuneration. The parties undertook that negotiation and, by a process of offer and acceptance, reached a concluded agreement as to all work items and the contractual remuneration for those work items. The basis of that remuneration, both as provided for and as agreed, was to be and was in fact fair and reasonable costs.

20.	This series of findings was made in relation to two preliminary issues that the parties had agreed the arbitrator would determine and before any other issues were dealt with and which he would make the subject of a first or interim award. Issue 1 was in these terms:

“Whether the Parties ever (and if so, when and in what circumstances) agreed a bill of quantities, whether in whole, or in part, for the purpose of valuation of the work carried out by the Claimant under architect’s instructions 51 and 52.”

21.	This issue, in reality, comprised several sub-issues. The arbitrator first had to decide whether AI 51 had contractual effect because, if it did, he would then have to decide whether, pursuant to the process for agreeing a bill of quantities provided for by AI 51, an agreed bill had eventuated. This required him to decide whether the contractual procedure required that all costs had to be agreed by Jackson Coles at fair and reasonable costs pursuant to an agreement which could only be achieved by the process of a single offer accepted without qualification or whether the individual rates could be agreed piecemeal. He also had to decide what the basis of remuneration was that was provided for by the words “fair and reasonable costs” in AI 51. If the arbitrator decided that AI 51 did not have contractual effect, he would then have to decide whether a subsequent contract had come into effect and, if so, what would be the basis of remuneration it provided for.

22.	The arbitrator found that Al 51 had contractual effect. His award found that:

“it was an agreed variation under an existing contract not necessarily requiring the rigour applied to the formation of contracts by case law. On the agreed facts there was negotiation and acceptance of the last draft of the AI [51]. That acceptance by Mr Turner on behalf of the claimant was a final and unqualified expression of assent to the terms of the counteroffer made by Mr Love to the first draft of a variation to an existing contract. Terms were agreed one of which expressly set out that:

‘All terms and Conditions to be as existing Contract dated 11 June 1997 between South Holland District Council and Hallamshire Construction with the following exceptions’ (Exceptions were listed …)”²

	²	Award: pages 14 – 15, lines 647 – 657.

23.	The arbitrator then found, as I have already summarised and set out, that the requirements of the AI as to agreeing the contract price were complied with and a revised scope of works and a contract price for those works that covered all items comprising the phase 2 works and which included an agreed mark up of 7.5 per cent was agreed by the parties in part by a process of offer and acceptance, in part by involvement and negotiation and in part by conduct.

24.	The claimant now seeks to challenge these findings in this appeal. The stated question of law is that, on the basis of the arbitrator’s findings of fact:

“applying the basic principles of offer and acceptance, there was no agreement as to the cost of the work to be undertaken since neither party accepted an offer made by the other.”

That question arises both in relation to the contractual nature of AI 51 and as to the finding that the contract rates and prices were agreed.

3.	The contentions of the parties on the appeal

25.	The claimant submitted that Bill A was intended to be, and was, an offer to carry out the works at the rates and prices set out within it. This offer was not accepted. Instead, the defendant submitted a counter-offer in November in the form of Bill B. This was not accepted by the claimant since, as the arbitrator found, Mr Turner considered that the circumstances under which the work was being carried out had changed and the bill rates had become academic. Moreover, Bill B contained a mark up of only 5 per cent which was unacceptable to the claimant. Finally, there was never any formal offer or acceptance of the mark up of 7.5 per cent. All that had occurred was the unilateral insertion of this mark up by Mr Love in the Final Account months after the conclusion of the work at a time when the claimant’s original offer containing this mark up had been superseded and had not been revived. The proffering of a Final Account by Mr Love that included this mark up could not therefore amount to a concluded agreement for a mark up recovery of 7.5 per cent.

26.	The claimant challenged the arbitrator’s reasoning which had led to his findings that AI 51 had contractual effect and that the bills of quantities were open to piecemeal negotiation and agreement.

27.	The claimant particularly contended that the process of agreement required by AI 51 was one involving the bills as a whole. The AI referred to:

“all costs in connection with this variation to be agreed at fair and reasonable costs by Jackson Coles.”

This wording, according to the claimant, envisaged a process of offer and acceptance based on a complete bible of work items and prices that had previously been finalised by a process of revision of the bills and drawings. Until that revision process had been completed and the resulting bible had been accepted a whole, there was no possibility of a contractual obligation covering phase 2.

28.	The arbitrator interpreted the critical phrase to mean that the rates in the bills would be agreed individually and not as a package. This was because AI 51 was not a new contract but an agreed variation to an existing contract which had incorporated into it a detailed regime for valuation and for the resolution of disputes as to cost based upon a process of omission, changes of specification and individual rate changes. Thus ‘agreed by Jackson Coles’ meant agreed using the contractual procedures and processes in place for ordering and valuing variations set out in the JCT form of contract.

29.	The defendant supported the arbitrator’s reasoning. It pointed out that the findings that AI 51 was negotiated and agreed as a contractual variation and that the entirety of the bill items and rates, including the mark up, had been agreed were findings of fact and that, in the light of those findings, the arbitrator’s overall finding that all phase 2 rates and prices had been agreed in the form set out in Bill B and that the mark up had been agreed were unassailable.

4.	The question of law answered

30.	In the light of the procedural history that I have summarised, the question of law raised by the claimant in this appeal is, in reality, a twofold one:

1.	Did Al 51 have contractual effect under the contract dated 11 June 1997 as an AI instructing a variation?

2.	Did AI 51 require Jackson Coles to agree the bills of quantities as a composite whole or could the necessary agreement of the prices in the bills of quantities be achieved piecemeal?

31.	The first question does not arise at all since, in the light of the arbitrator’s findings, it does not raise a question of law that arises out of the award. The arbitrator made findings of fact to the effect that the parties negotiated a fresh contract whose intention was to vary the existing contract. The negotiated terms of this fresh contract were those set out in AI 51. It follows that the arbitrator found as a fact that the parties negotiated the terms of AI 51 and agreed them and also agreed that that Al 51 would take effect as a variation to the existing contract. Those findings are unappealable and the claimant did in fact seek to appeal them.

32.	In answering the second question, it is first necessary to set the relevant words of AI 51 into context. In construing these words, the entirety of the wording of AI 51 must be considered against the factual matrix common to both parties on the date that the variation agreement concerning AI 51 was reached. On that date, the defendant, as was known to the claimant, had defined the scope of phase 2 and had received a tender pricing all work items from the claimant which was unacceptable to it. However, work was to start prior to the finalisation of the process of work scope and rate reduction which was intended to produce a price for phase 2 work acceptable to the defendant. This price reduction process was being carried out using the traditional process provided for defining and pricing variations within the JCT contract that the arbitrator had already defined. This included the processes of omission, specification change and re-rating. Once that process had been concluded, as AI 51 stated, the bills of quantities that had been prepared in April 1997 would be revised to produce reduced costs and the drawings and specifications, also previously prepared, would be revised and reissued to reflect the amended items in the bill of quantities.

33.	It followed that AI 51 defined with some precision the scope of phase 2 work. On the date it was issued on 16 July 1997, the scope of work was that shown in the bills of quantities, drawings and specifications previously prepared but their revised state that existed at the date of AI 51. The costs were those previously tendered but as partially revised by the same date. Further revisions of work items, rates, prices, drawings and specification items were envisaged and these would be achieved by varying the scope of work and its cost as these stood on 16 July 1997. The final agreed package, arrived at by a complex piecemeal negotiation of individual work items, drawings, specification items and bill rates, would constitute the fair and reasonable costs that Jackson Coles would agree.

34.	In the light of the wording of AI 51, taken against this factual background, it is clear that the arbitrator’s understanding of the meaning of the relevant words of AI 51 is correct. The process of agreement required of Jackson Coles was one involving the agreement of individual work items and their cost, it was not one involving the negotiation and finalisation of an entire contract or a composite set of bills of quantities. It was not necessary, therefore, for the entirety of the bills of quantities, specification and drawings first to be negotiated and then offered by one party as a composite package for acceptance by the other party.

35.	It follows that, applying the arbitrator’s findings of fact as to the agreed content of the bills of quantities and the mark up, there was agreement as to the cost of the work to be undertaken. No offer was needed and the absence of an acceptance, using the concepts of ‘offer’ and ‘acceptance’ as these are used in the law relating to contract formation, was immaterial.

36.	In consequence, the claimant’s appeal must be dismissed and the award of the arbitrator confirmed.