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Oral construction contracts and adjudication

It is almost four years since the amendments to the Construction Act 1996 came into force. In all that time, we haven’t seen the anticipated flurry of cases dealing with the new payment rules (although there has been handful in the last 18 months or so) or the consequences of extending the definition of construction contract through the repeal of section 107 to include oral contracts. Therefore, it came as a bit of a pleasant surprise to read Stuart-Smith J’s judgment in Purton (t/a Richwood Interiors) v Kilker Projects Ltd.

Purton (t/a Richwood Interiors) v Kilker Projects Ltd

This is a case all about an oral contract, an oral “construction contract” to be precise. The adjudicator (Mr Christopher Hough) was faced with a payment dispute. In the process of deciding that due to the lack of a payment or pay less notice, Kilker should pay the £150,000 claimed in the final account, the adjudicator also had to decide if the parties had a contract.

From the judgment it is clear that there was much that the parties did not agree on. For example, they could not agree:

  • Whether Kilker had entered into a contract with Mr Purton or Mr Purton’s company, Richwood Interiors (or Richwood London Ltd). To keep it simple, I’m going to refer Mr Purton.
  • When the contract was entered into. Mr Purton alleged it was about 9 June 2014, Kilker said it was much later.
  • What the scope of the works was. Mr Purton said the works were originally valued at £350,000, whereas Kilker suggested the price was in the range of £550-600,000.

It was agreed that the parties’ contract was oral (at least for the purposes of the enforcement hearing), that it was for the joinery package for works at the Dorchester Grill and that those works were carried out during September and October 2014 (although preparatory steps were taken before then). Kilker made payments in excess of £650,000, which suggests a substantial amount of work was carried out by Mr Purton. The earliest invoice seems to have been dated 20 May 2014.

Intention to create legal relations

It is interesting that Stuart-Smith J didn’t actually determine what the precise terms of the parties’ oral contract were. Instead, he focused on general principles of contract formation (including an intention to create legal relations) and looked at case law where there had been performance by the parties. He referred to the Court of Appeal’s judgment in Percy Trentham Ltd v Archital Luxfer Ltd), where Steyn LJ said:

“The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter legal relations. It will often make it difficult to submit that the contract is void for vagueness or uncertainty… the fact that the transaction is executed… may make it possible to treat a matter not finalised in negotiations inessential…”

He also considered the Supreme Court’s judgment in RTS Flexible Systems Ltd v Molerei Alois Muller GmbH & Co, where Lord Clarke said that:

“Steyn LJ was not saying that it follows from the fact that the work was performed that the parties must have entered into a contract. On the other hand, it is plainly a very relevant factor pointing in that direction. Whether the court will hold that a binding contract was made depends upon all the circumstances of the case, of which that is but one.”

Here, Stuart-Smith J noted that this approach may be particularly important where either:

  • There was no doubt that works were agreed to be carried out and were in fact carried out, but the price for those works was either not agreed or subject to future variation.
  • An original scope of works was agreed (with or without a price being agreed) in the knowledge that further works may be added later (either by a formal process of variation orders or less formally).

In both cases where works were carried out, the court may readily find that there was an intention to create legal relations. Further, if the price was not agreed, or there was insufficient certainty about that agreement, rather than denying the existence of a contract altogether (which was a drastic solution), the court said it would readily infer that the person carrying out the works was entitled to be paid on a quantum meruit basis.

Was there a contract?

The court decided that it was “clear beyond argument” that there was a contract, as there had been “substantial performance” on both sides (Kilker had paid, Mr Purton had done the work). It was unrealistic to suggest that there was not a “legally binding agreement”. It was likely that if Mr Purton had failed to turn up to site, “he would have got a dusty reply, and rightly so”. Both parties needed the assurance of knowing the work would be done and it would be paid for.

That all looks relatively straightforward to me, on paper at least. The real difficulty often lies is ascertaining what the terms of the oral contract are and where the evidence for that is. This was demonstrated here with the witness statement of Mr Brendan Kilker of Kilker. He denied that he met Mr Purton on 9 June (as Mr Purton alleged). He did this, even though there was an email dated 12 June that suggested the two had met on site that day.

It isn’t clear whether those individuals gave evidence before Stuart-Smith J but, in my experience, trying to get to the bottom of disputed facts can properly be dealt with during a meeting with the adjudicator, where the adjudicator can ask questions and test the evidence. It may not be something we had to do so much of before the Construction Act 1996 was amended, but we’ve had four years to practice.

Party to “a” contract

I thought the discussion about whether the contract relied on was the correct contract was interesting, especially as Stuart-Smith J suggested it did not matter. What was important under the Construction Act 1996 was that there was a construction contract and a dispute arising under it. This is what gave the adjudicator jurisdiction. It also brought the Scheme for Construction Contracts 1998 into play. It was unnecessary to identify “each and every term with complete accuracy”. If it were, that would not be consistent with the policy of adjudication being a quick and effective remedy and “equally accessible” to those with legal representation and those without.

Back in 2012 I suggested that adjudicators were already dealing with contracts that were not in writing. It seems we are coping rather well, since we still haven’t been successfully challenged on enforcement yet! Stuart-Smith J’s judgment gives us further guidance in this area and will, hopefully, close the door to some arguments that are “technically fascinating” but “entirely lacking in merit”.

 

MCMS Ltd Matt Molloy

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