REUTERS | John Kolesidis

Adjudicating an oral contract

From 1 October 2011, for the first time, parties will be entitled to refer disputes arising under wholly or partly oral contracts entered into after this date to adjudication.

We will have to wait and see whether this change produces an avalanche of new claims but, even if it doesn’t, clients, their advisers, adjudicators and the courts will be presented with a variety of new challenges as a consequence of the change in the law.

New jurisdictional challenges?

Where a claim is brought under an oral contract the responding party may dispute whether the parties have entered into a contract at all, raising a potential jurisdictional issue as to whether there is a “construction contract” for the purposes of the Construction Act 1996. This creates a risk for the referring party that the adjudicator’s decision will be subsequently challenged by the responding party and that the courts will refuse to enforce it if the judge disagrees with the adjudicator’s contractual analysis.

Should Part 8 be used?

It has always been the case that, before commencing an adjudication, a referring party needs to consider carefully whether a construction contract exists, identify its terms and the evidence required to prove its case to an adjudicator’s satisfaction. However, the increased potential uncertainty that surrounds an oral (or partly oral) contract may make it prudent for the referring party to obtain a lawyer’s opinion on these matters before it does anything else with its claim.

Depending on the circumstances, the parties may wish to seek declaratory relief under CPR Part 8 to determine whether there is a construction contract in existence before commencing adjudication proceedings. However, this approach may not be appropriate if there is an underlying factual dispute between the parties that can only be resolved by the courts hearing oral evidence.

Matters for the adjudicator

Adjudicators will need to consider the directions they give to deal with disputes relating to oral (and partly oral) contracts. For example:

  • Will they deal with the existence and terms of an oral contract as a preliminary issue on which they give their decision first before moving onto the substance of the dispute?
  • Will they deal with the dispute as a whole, including the existence and terms of the parties’ contract?
  • Can this issue be dealt with on paper or will a meeting with the parties be required?
  • Can the adjudicator do justice to the issues in dispute between the parties, including determining whether this is a construction contract, within the statutory timetable?
  • How far does a parties’ right to make effective representations to the adjudicator go? Does it extend to a meeting before the adjudicator, or allow the parties to cross-examine other witnesses?

One dispute or two?

Another issue that arises for adjudications under the Scheme for Construction Contracts 1998 (as amended), is whether there is one dispute or two, when there is a dispute as to both the existence of a contract and the relief claimed by the referring party. If dealing with both issues amounted to the adjudicator dealing with more than one dispute, unless the parties agreed he could deal with both, that would render the adjudicator’s decision unenforceable.

On enforcement

When these matters come before the court on enforcement, it seems likely that the TCC will need to revisit previous case law and principles in light of the change in the law. This throws up a number of issues, such as whether the TCC judges will be prepared to hear oral evidence from witnesses at an enforcement hearing or whether they will require the evidence to be tested at a full trial. If they do err on the side of a full trial, where will this leave the TCC’s “rapid procedure for enforcing an adjudication decision”?

It seems inevitable that the inclusion of oral (and partly) contracts within the Act’s scope will lead to an increase in the number of disputes as to whether or not a construction contract exists between the parties. What will be interesting is how adjudication procedure and practice changes as a result, how parties will overcome the challenges presented by these changes and how robustly the TCC deals with these new challenges.

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