| Date | 1 August 1996 |
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| Judgment | Balfour Beatty Construction -v- Kelston Sparks Contractors and Mooney -v- Henry Boot Construction; Court of Appeal, 10 July 1996 |
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| The Issue | Operation of clause 10(2) of the FCEC Blue Form of Subcontract. |
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| Implication |
Only the direct costs of unforeseeable ground conditions and any consequential costs of delay and disruption claimed under main contract clause 12(3) fall to be passed down to the subcontractor under clause 10(2). |
printIn Contract Journal on 18 January 1996 I reported the case of Balfour Beatty Construction -v- Kelston Sparks which had been decided on 30 October last year. This case has now come before the Court of Appeal and the decisions which were handed down in October of last year have been further clarified, and it might be said that a narrower interpretation has now been placed upon the clauses which were in question. The case deals with ICE 5th Edition and FCEC Blue Form of Subcontract, clause 10(2), which provides that the contractor shall take all reasonable steps to secure from the employer such contractual benefits, if any, as may be claimable in accordance with the main contract on account of any adverse physical conditions or artificial obstructions. On receiving such benefits the main contractor is required to pass on to the subcontractor "such proportion, if any, as may in all the circumstances be fair and reasonable." This clause is primarily aimed at clause 12 of the main contract which provides a scheme for dealing with unforeseen physical conditions or artificial obstructions. Unforeseen ground conditions were encountered and Balfour Beatty had received approximately £ 900,000 from the employer. An arbitrator awarded that Kelston Sparks were entitled to a sum in excess of £ 800,000 under the provisions of subcontract clause 10(2). Appealing the arbitrator's award the decision of the High Court in October of last year addressed the type of claim which might be caught by clause 10(2). The judge clarified: "That the benefits which the main contractor must pass down to the subcontractor extended only to those instructions or variations which had arisen directly as a result of encountering adverse physical conditions". Thus benefits which flowed from instructions given by an engineer in accordance with clause 13 of the main contract would fall to be passed down to the subcontractor, providing that the relevant instructions or variations were given on account of any adverse physical conditions or artificial obstructions. In the Court of Appeal this latter definition has been held to be too wide. They held that out of clauses 12, 13 and 51 only claims within clause 12(3) which are not covered by an instruction or variation (that is, the direct cost of additional work, and consequential costs of delay and disruption) come within the ambit of subcontract clause 10(2). In other words, all other instructions and variations must be resolved under clauses 7, 8 and 9 of the subcontract and will not be caught under the passing down system of clause 10(2). The Court of Appeal was also asked to look into the question of proportional benefit and to give guidance as to how an arbitrator is expected to deal with this passing down of benefits to subcontractors. For example they were asked to consider whether the circumstance that physical conditions or artificial obstructions were reasonably foreseeable by a subcontractor ought to be taken into account so as to diminish the sum payable to the subcontractor. The court agreed that an arbitrator would be right to take such considerations in account, even where the main contractor had obtained a 'windfall' settlement from the employer. Accordingly if any inappropriate elements had entered the award under clause 12 of the main contract, the arbitrator would be obliged to analyse that payment for the purpose of eliminating those elements before apportionment to the subcontractor. Heard at the same time as the Balfour Beatty appeal, was an appeal between Mooney and Henry Boot Construction dealing with the same clauses but in this case appealing the more fanciful decisions of His Honour Judge Humphrey Lloyd QC in the lower court. Firstly Judge Lloyd had held, in circumstances similar to Kelston Sparks, that clause 10(2) applied only to contractual benefits which the main contractor was entitled to receive from the employer. He considered that where the main contractor's claim, despite being awarded by an arbitrator, was entirely unmeritorious under the terms of the main contract, no sum could be payable to the subcontractor under the provisions of 10(2). The Court of Appeal were reduced to clarifying that the words "as may be claimable" in clause 10(2) did not mean justified or proved, but merely that the claim under the main contract could be "made in good faith". Judge Lloyd had also held that clause 10(2) was merely a procedural mechanism and did not of itself constitute grounds for recovery. In fact he held that he could find nowhere in the subcontract grounds for recovery similar to clause 12 of the main contract, and accordingly the subcontractor would not be entitled to any payment. The Court of Appeal has dismissed this absurd notion in a very sweeping fashion stating that there does not have to be a ground for recovery beyond that contained in clause 10(2) itself. The clause says that the main contractor shall pass on such proportion of the benefit as may be fair and reasonable. This was sufficiently plain English, in their view, to impose a legal obligation on the main contractor.
CJ-9625
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