| Date | 24 September 1997 |
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| Judgment | o-Operative Wholesale Society Limited -v- Birse Construction Limited Court of Appeal, 9 July 1997. 1997CILL1281 |
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| The Issue | Effect of arbitration awards in name borrowing arbitrations. |
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| Implication |
The decision of an arbitrator in a main contract arbitration between main contractor and employer may directly effect the rights of a sub-contractor to the detriment of the main contractor. |
printThere can be no doubt that life is very difficult for sub-contractors in the construction industry, and we appear to spend an inordinate amount of time discussing their condition. One should however spare a thought for the poor main contractor caught in the trap of a sub-contractor's "name borrowing" arbitration. Never mind Sir Michael Latham's "win win" philosophy for construction. Here main contractors seems to be certain only of lose lose. The case of Co-Operative Wholesale Society Limited -v- Birse Construction Limited, decided in the Court of Appeal on 9 July 1997, gives guidance to main contractors to avoid such arbitrations at all costs. Birse were the main contractors for the construction between 1987 and 1989 of the Dalston Cross shopping centre in London. Co-Operative Wholesale Society (CWS) were not as one might imagine suppliers of bread, milk and cereal, but were the nominated mechanical and electrical services sub-contractor on the same project. Disputes arose in both the main contract with the employer, a developer named College Estates, and in the sub-contract, and eventually both of these were referred to arbitration. Some of the complaints of the sub-contractor concerned certificates of the architect and other claims which if proved would result in the employer becoming liable to pay increased sums to the main contractor for work within the sub-contract. These claims were therefore included in the main contract arbitration using the "name borrowing" provisions. It seems attractive now with hindsight to say that the main contractor should have vigorously opposed those claims, but the reality was that the main contractor's case was closely tied to these issues and to oppose them would have effectively been to oppose its own case. In any event they had a modest financial interest in their success since it was entitled to 2.5% cash discount on such payments and therefore it supported the sub-contractor's claims in the main contract arbitration wholeheartedly. Throughout the many months of pleading and preparation of the case prior to the arbitration hearing, the employer, College Estates, played a somewhat distant, disinterested role. When eventually the hearing took place they failed to turn up. Accordingly, the arbitrator was forced to hear the evidence of the main contractor and sub-contractor, both of whom were represented by solicitor and counsel, unopposed. Though he had to test that the claims which were being made were generally bona fide, the hearing was swiftly concluded and the arbitrator held that the sum of approximately £4.75 million should be paid by College Estates. Of this sum, approximately £750,000 was in respect of claims advanced by the sub-contractor. Within 12 days of the end of the hearing and before the sums awarded fell due to be paid, the inevitable happened. College Estates went into liquidation. To this date they have not paid one penny piece to Birse Construction. But here comes the sting in the tail. The sub-contractor has claimed that it was entitled to its proportion of the award from the main contractor, and litigation has ensued to determine this position. Effectively Birse's interest in the success of these claims has been converted from a positive 2.5% to a negative 97.5%. In 1995 Judge Hicks in the Official Referees court held that Birse were bound to pay their sub-contractor. The effect of the award of the arbitrator had been to revise the architect's certificates. Had the main contractor received the money the sub-contractor would have taken the risk of the main contractor's insolvency. There was no question of the sub-contract obligation to pay being conditional upon receipt of the money from the employer. In other words, there was no pay when paid provision in the sub-contract. Thus the main contractor took the risk of the employer's insolvency. The architect's certificate in respect of nominated sub-contract works, and the arbitrator's opening up and review of that certificate created the right to payment. So certain was this decision that it has taken Birse nearly two years to get before the Court of Appeal. On appeal the court has held that the main contractor remains obliged to pay the sub-contractor; appeal dismissed. It has always been thought that name borrowing arbitration is a perilous process, a particular concern being that the disputes between the sub-contractor and employer might conflict with the interest, rights and obligations of the main contractor. This case shows that the process is potentially very damaging to the main contractor even in circumstances when a main contractor has no basis or apparent interest in opposing the sub-contractor's claims.
CJ-9735
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