On whose terms? Adjudicating oral construction contracts

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

One of the most significant changes to the Construction Act brought about by part 8 of the Local Democracy, Economic Development and Construction Act 2009, was to remove the need for construction contracts to be in writing for the rules of the Construction Act to apply.

As a result of this change, it is now possible to refer disputes arising under oral construction contracts to adjudication. In the past month, two cases have helped clarify the extent to which an adjudicator is able to interpret the terms of such contracts.

Purton (trading as Richwood Interiors) v Kilker Projects Ltd [2015] EWHC 2624 (TCC)

This case concerned the enforcement of an adjudicator’s decision on a dispute arising out of an oral contract. The dispute in question related to whether or not a construction contract existed, and if so the terms on which it existed, for works to refurbish the Dorchester Grill in London.

Mr Justice Stuart-Smith concluded that it was “clear beyond argument” that there was a contract. He then had to consider, however, whether an adjudicator’s decision was valid in the circumstances where either the referring party had commenced the adjudication under a different contract from that which the adjudicator had decided existed, or had made a mistake as to its terms.

Dealing with the latter first, Mr Justice Stuart-Smith decided that a party’s right to adjudicate was “not dependent upon identifying each and every term with complete accuracy” and that not to provide a party with a remedy via adjudication in the event of a minor error as to contractual terms would be “as a matter of legal policy unacceptable”. It is clear then that claimants will not be punished for their failure fully and accurately to identify the terms of the contract in question, nor will the adjudicator be stopped from analysing and determining the actual terms of the contract in such circumstances.

As to the position where the referring party had proceeded on the basis of the “wrong” contract, in the circumstances where the terms of the contract as interpreted by the adjudicator make such a contract materially different to that identified by the claimant, the judgment provides key analysis of an adjudicator’s liberty to interpret the terms of an oral contract. In this case, the question was whether or not the provisions of the Construction Act regarding payment and pay-less notices applied. Mr Justice Stuart-Smith determined that even if the terms of the contract as interpreted by the adjudicator made it a different contract to that identified by the referring party, provided the provisions in question applied to both contracts (in this case the statutory payment regime), the reasoning of the adjudicator would be valid. Within his judgment Mr Justice Stuart-Smith made clear that:

“where there can be no doubt that the adjudicator, if properly informed, should and would have concluded that he had jurisdiction and the proper basis of jurisdiction does not make a difference to the substantive outcome, the Court should not shut out a Claimant who comes to the court to enforce the adjudicator’s decision”.

In short, even if the contract terms as interpreted and understood by the adjudicator would make the contract manifestly different to that identified by the claimant, his decision will still stand as long as those differences do not affect his reasoning. Accordingly, the adjudicator’s decision was enforced because the losing party was unable to identify “any variant of the contract which would affect the outcome of the adjudicator’s substantive decision”.

Mr Justice Stuart-Smith also made a key distinction between the present case and previous legal decisions on the basis that the previous cases were “decided when the adjudication regime required writing to establish jurisdiction”. This crucially sets out that the approach to oral contracts is, and will continue to be, distinct as from written contracts. In the case of the former, an adjudicator will be granted greater freedom to interpret the terms of any agreement.

Wycombe Demolition Limited v Topevent Limited [2015] EWHC 2692 (TCC)

This again involved the enforcement of an adjudicator’s decision made in relation to a dispute arising under an orally agreed contract. In the absence of any written terms, the adjudicator valued the works without reliance upon either party’s methodology. In deciding whether the adjudicator was entitled to do so, Mr Justice Coulson stated that:

“An adjudicator has to do his best with the material with which he is provided. He has considerable latitude to reach his own conclusions based on that material…In my view, this latitude will inevitably be even wider now that the original constraint…that there had to be a written contract has been removed by amendment.”

It is significant that Mr Justice Coulson acknowledged the distinction between oral contracts and those in writing when it comes to the latitude which an adjudicator has to interpret a contract. He made clear that provided the adjudicator is not making good the deficiencies in a party’s case (nor presumably breaching any of the other established rules of natural justice), he will have a great deal of freedom to interpret the terms of an oral contract with regard to the evidence presented before him. As with the judgment of Mr Justice Stuart-Smith in Purton v Kilker, this represents a departure from the approach in respect of written contracts.

Conclusion

It remains, of course, best practice to ensure that any construction contract is agreed in writing before the works start. However, the commercial reality of projects sometimes means that works start (or are even completed!) without a written contract in place.

These cases illustrate that in the event of a dispute an adjudicator has wide jurisdiction to interpret the terms of an oral contract in a manner that is distinct from those argued by the parties, provided the evidence submitted permits such an interpretation. Further, the assertion of Mr Justice Coulson in Wycombe v Topevent that “the adjudicator has to do his best with the material with which he is provided” renders it imperative that both parties to an oral agreement seek to set out with clarity and consistency the terms on which the contract is being administered, for example by setting clear procedures for instructions, payments and variations, and keeping thorough records of the same.

This should serve to minimise the extent to which an adjudicator can exercise their discretion to interpret the terms of such a contract.