Barrier Ltd v Redhall Marine Ltd

Introduction

This is an application, issued on 2.7.15, of the Applicant (Barrier) for pre-action disclosure under CPR r.31.16 against the Respondent (Redhall).

In December 2001 Redhall entered into a contract with BAE for the construction of Astute Class submarines for the Ministry of Defence (MoD). In January 2002 Redhall then sub-contracted part of its functions under the Main Contract to Barrier. Barrier’s role under the Sub-Contract related mainly to painting the submarines internally and externally.

The Sub-Contract is for 3 submarines only – Boats 1 to 3. It is common ground that Barrier carried out work on 3 other submarines, Boats 4 to 6.

It will be necessary to refer to the Subcontract in more detail later in this judgment. It is, however, common ground that under clauses 4.2 and 4.3 Redhall is only obliged to pay Barrier out of moneys that have been paid to it by BAE under the Main Contract.

Barrier contends that substantial sums have been deducted by Redhall in respect of the sums otherwise due to them. These are set out in the agreed case summary as follows:

Barrier is contemplating proceedings against Redhall to recover these sums. However it appreciates that if these deductions have in fact been made by BAE the action will fail. The purpose of this application is to discover whether there any documents in Redhall’s custody, possession or power which will show what payments have been made by BAE and whether these deductions have in fact been made.

Redhall seeks to defend the application on a number of grounds. First, it asserts that the subcontract incorporates an arbitration agreement. If so any proceedings are liable to be stayed with the result that there is established authority that there is no jurisdiction to make an order for pre-action disclosure. Second, it asserts that no such documents exist. Third it contends that the order sought is too wide.

Barrier does not accept that any arbitration agreement was incorporated into the subcontract. It further distinguishes between Boats 1 – 3 and Boats 4 – 6. Even if the contract for Boats 1 – 3 incorporated the arbitration clause it does not accept it was incorporated for Boats 4 to 6.

Incorporation

It is convenient to deal with the incorporation issue first in relation to Boats 1 – 3.

Redhall was previously known as Chieftain Insulation Ltd. (CIL). It changed its name to Redhall on 1^st April 2011.

It is not in dispute that in December 2001 CIL sent Barrier a purchase order in respect of painting and scaffolding work on Astute Submarines. The Purchase Order was numbered 122274. It purported to come from Chieftain Power Services Ltd (CPSL) which is not the same company as CIL but is a company within the same group. On the face of the document there appears this sentence.

“The terms overleaf must be read and strictly adhered to.”

The evidence establishes that there are at least two copies of every purchase order. The top copy is designed to be sent to the client has CIL’s standard conditions on the back. The carbon copy, which is yellow, is retained by CIL and has nothing on the back. All the companies within the group use the same standard conditions and similar forms of purchase order.

Barrier has produced the purchase order that was sent to it in December 2001. It appears that for some unexplained reason it was sent the yellow carbon copy with no conditions on the back.

The Standard Conditions of CIL include as Condition 18:

“18.

Arbitration.

Any dispute or indifference (sic) arising from the Contract shall on application of either Seller or Purchaser be submitted to arbitration in accordance with the Arbitration Act 1950 or any amendment or re-enactment thereof for the time being in force.”

It is not in dispute that, if incorporated, this would be an effective arbitration clause which would be effective to prevent the application for pre action disclosure.

In the course of his submissions Mr Menon drew my attention to a number of the Standard Conditions which he submitted were unsuitable for a contract such as this. These included a clause about packing and a clause about patents. It is not necessary to refer to them in detail.

The Main Contract between BAE and CIL is lengthy and detailed. It contains an arbitration clause in clause 19 and a privacy clause in clause 20.

The subcontract is dated January 2002 and made between CIL and Barrier. It is short 3 page document containing only 10 clauses. I was referred in particular to clauses 1, 9 and 10.

A number of points can be made at this stage:

Ms McCarthy submitted that the provisions of the subcontract were sufficient to incorporate the arbitration clause in CIL’s standard terms. Alternatively she contended that clause 9 of the subcontract was effective to incorporate clause 19 of the Main Contract. She submitted that the ordinary contractual rules apply. In paragraph 26 and 27 of her skeleton argument she puts the point in this way:

Mr Menon submitted that special rules apply to the incorporation of arbitration clauses. He referred me to the decision of the Court of Appeal in Aughton Ltd v M.F. Kent Services Ltd [1991] 57 BLR 6 where somewhat differing views were expressed by each of the two members of the court. Lord Justice Ralph Gibson thought that there was no special rule of construction that general words would not incorporate an arbitration clause; but that the question was whether the parties so clearly expressed by the words used an intention to incorporate the relevant clause that the Court had to modify its terms so as to be applicable to disputed under the sub-sub-contract. Sir John Megaw thought that an arbitration clause could not, even outside the bill of lading context, be incorporated by general words. He observed that it was implicit in the speeches in Thomas v Portsea that clauses in the charterparty other than the arbitration clause could be validly incorporated by the use of general words, such as clauses governing the shipment or carriage or delivery or the terms upon which delivery was to be made or taken. It followed that the reason for excluding an arbitration clause was not confined to the special features of the charterparty/bill of lading relationship nor to the fact that the bill of lading was a document of title.

He submitted that on Ralph Gibson LJ’s test the incorporation was not sufficiently clearly expressed. On Sir John Megaw’s test the general words in clause 18 were plainly insufficient.

This area of law was considered by Christopher Clarke J in a comprehensive judgment in Habas Sinai v Sometal [2010] EWHC 29 Comm. In paragraph 13 of his judgment he pointed out that parties are free to incorporate (or seek to incorporate) whatever terms they choose by whatever method they choose. He identified 4 separate situations:

After an exhaustive review of the authorities (including Aughton Ltd) he expressed his conclusions in paragraphs 46 – 49 of his judgment. The essence of his reasoning is paragraphs 46 and 49.

Thus it can be seen he distinguished between the case where there are only two parties involved where no special rules apply and the case where the attempt is to incorporate an arbitration clause between two other parties or one of the parties and a third party. In that situation there is a particular need to be clear that the parties intended to incorporate the arbitration clause.

Christopher Clarke’s approach was followed by Beatson J in TTMI SARL v Statoil [2011] EWHC 1150 (Comm) where he said at paragraph 51:

I propose to follow the same approach. I am content to assume (without deciding) that the purchase order sent to Barrier had no conditions on the back. For some unexplained reason the wrong copy was sent or given to Barrier. However a reasonable person reading clause 10 of the subcontract would have no doubt that CIL’s standard terms were incorporated. The fact that they were not on the back of the purchase order does not affect this. It would, at all times have been open to Barrier to request a copy of the terms if they had wanted to.

The incorporation of clause 19 of the Main Contract is more problematical. This is the incorporation of terms in a contract between BAE and CIL. Thus clear words are required. There are considerable difficulties in incorporating clause 19 in that significant modifications would be required and it is not easy to see how clause 19.5 can be adapted without doing significant violence to the wording. In my view the wording of clause 9 of the sub-contract is not sufficiently clear to incorporate the arbitration clause in the Main Contract.

In my view, however, clause 18 of CIL’s standard terms was incorporated. It follows that in the light of Travelers Insurance Company Ltd v Countrywide Surveyors Ltd [2010] EWHC 2455 (TCC) that the application for pre- action disclosure in respect of Boats 1 – 3 must fail.

It appears that the instructions in relation to Boats 4 – 6 were oral. The only document to which I was referred was the Minutes of a relationship meeting held on 29^th October 2012 attended by Mr Goodenough, Mr Gray and Mr Burrows of Redhall and Mr Bowles and Mr Harriman.

The Relevant Minute records the fact that there is no contract for Boat 4 onwards. It continues:

Addendum 4 is a document between BAE and CIL. It refers to a number of further purchase orders at least one of which referred to Boat 4. It acknowledged that the purchase orders were a modification to the [Main] Contract and that further work may be needed to be incorporated into the Contract in particular until such time as a separate Boat 4 Contract is agreed.

In paragraphs 12 – 17 of his witness statement dated 11 June 2015 Mr Bowles deals with Boats 4 – 6 in paragraphs 12 – 17 of his witness statement. In summary he says:

It is, of course, part of Barrier’s case that the contracts for Boats 4 to 6 are subject to the modification referred to by Mr Bowles on the same terms as the contract for Boats 1 – 3. For reasons I have given that would include the arbitration clause.

However the question arises as to whether the contracts for Boats 4 – 6 are contracts in writing within the meaning of the Arbitration Act 1996. If not the provisions of Part 1 (including the right to stay proceedings) would not be incorporated.

Agreements in writing are widely defined in s 5 of the 1996 Act.

So far as Boats 4 – 5 are concerned it seems to me that the agreement is evidenced in writing, that is to say the Minute of the 29^th October 2012 meeting which incorporates the work for those 2 boats into the subcontract.

Boat 6 is not mentioned in any written document. No authority was cited to me on the construction of s 5. However it seems to me to follow from Mr Bowles’s evidence that the parties agreed that the work on Boat 6 would be carried out subject to the sub- contract as modified in the way he suggests. In those circumstances it would be within s 5(3) of the 1996 Act.

It follows in my view that the contract in respect of Boat 6 also incorporated the arbitration clause in CIL’s standard terms. If, contrary to my view, the arbitration clause was not incorporated into Boat 6, Barrier still has to overcome the other three jurisdictional hurdles in CPR 31.16 (3)(d). In other words disclosure must be desirable to dispose fairly of the anticipated proceedings or to assist the dispute to be resolved without proceedings or to save costs. I would probably have held that these objectives could be met if there had been no arbitration clause in respect of Boats 1 – 5. It might well have enabled Barrier to have discovered at an early stage whether any deductions had in fact been made by BAE which had simply been passed on to Barrier. In that event there would have been little point in issuing proceedings.

However I have great difficulty in seeing how pre-action disclosure in relation solely to Boat 6 is going to achieve any of these objectives. There will still be a dispute with regard to Boats 1 – 5 which will have to be determined by arbitration. It seems to me very unlikely that there would be any significant overall saving of costs. Furthermore the issues in respect of Boat 6 are less clear than those in respect of Boats 1 -3. Even if these jurisdictional hurdles could be overcome there is a discretion as to whether pre-action disclosure should be ordered. As a matter of discretion I would decline to order pre-action disclosure in respect of only Boat 6.

Conclusion