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Oral construction contracts and issues in adjudication enforcement

Two recent judgments illustrate the difficulties that oral contracts can cause in adjudication enforcement proceedings. The first was Jefford J’s judgment in Hart v Ideal and the second (although actually the first in time) was Fraser J’s judgment in Dacy v IDM (which had also been before Jefford J a couple of years earlier).

Let’s begin at the beginning

In the good/bad* (*delete as appropriate) old days, that is before section 107 was repealed, the right to refer a dispute to adjudication only arose where the construction contract was in writing in accordance with section 107 of the Construction Act 1996.

Section 107 was very broad and an agreement was “in writing” if it was made in writing, made by an exchange of communications in writing, evidenced in writing or was an oral agreement made by reference to terms that were in writing.

As Coulson J (as he was then) noted in the second edition of his book, Coulson on Construction Adjudication, this was a  “troublesome” and “rather curious set of provisions” and it led to considerable case law as the parties (and the courts) tried to determine exactly what these provisions meant. However, one thing was clear. If the parties had an oral contract, or an agreement that was partly in writing and partly oral, that was usually fatal and the courts were unlikely to enforce an adjudicator’s decision.

Therefore, there was considerable enthusiasm for the repeal of section 107. I think Matt put it rather well when he said:

“Just about everyone agrees that opening up adjudication to parties who didn’t get around to sorting out their paperwork is a good idea, although a number of commentators have expressed concern that adjudicators may not be up to the job of deciding what the terms of the parties’ contract are, if there isn’t a written contract.

I don’t agree that adjudicators can’t work out what the terms of the contract are. We do it routinely now…”

In the third edition, written several years after section 107 was repealed, Coulson J noted that:

“It is thought likely that the repeal of s107 in its entirety will add to the work of both adjudicators, and judges asked to enforce their decisions. … These difficulties are not to be underestimated.”

He continued in this vein in Penten Group Ltd v Spartafield Ltd, where he thought there was a wider point, particularly as adjudicators were now being asked to deal with “complex questions as to contract formation, appropriate terms and the like”, as well as the underlying claims, and all in 28 days. Because of this, in relation to how adjudicators dealt with such disputes, he said:

“… the courts are going to have to give adjudicators some latitude as they grapple with these difficulties. In an ordinary case, and depending on the words of the notice, it may be unduly restrictive to conclude that an adjudicator could decide what the contract was not, but not what the contract was.”

Although Coulson J had identified the additional tasks adjudicators now face when dealing with oral contracts, he also recognised that it had also created additional tasks for judges at the enforcement stage. This is because the question of whether the parties have entered into a contract and, if so, on what terms, will often go to an adjudicator’s jurisdiction, as well as the substantive dispute. As such, it is an issue that often needs to be addressed at the enforcement proceedings.

In some cases, the court has dealt with the question in the enforcement proceedings, as Stuart-Smith J did in Purton (t/a Richwood Interiors) v Kilker Projects Ltd. However, in others it has found that the party resisting enforcement has a realistic prospect of succeeding with its defence, and that the summary enforcement proceedings are not a suitable forum to make findings on such matters, as Jefford J did in Dacy.

This brings me back to Hart v Ideal and Dacy v IDM.

M Hart Construction Ltd and another v Ideal Response Group Ltd

This dispute arose out of works carried out to the athletes’ village at the Olympic park during the summer of 2012. It started life as an oral contract between Mr Hart and Ideal, whereby Mr Hart agreed to repair water damage at the village. Over time, the contract’s scope of works expanded to include the works necessary to convert the village to residential use. The judgment refers to this as the retrofit contract. Subsequent defects were remedied under a separate defects contract. At some stage, Mr Hart stopped trading as a sole trader and started trading as a company, M Hart Construction Ltd.

One of the main issues was whether there had been a novation of these contracts. The adjudicator found that there had been, whereas when the matter came before Jefford J in enforcement proceedings, she found that there was insufficient evidence to infer or imply that novation had taken place. This meant there was a realistic prospect of Ideal defending the claims on the basis that there was no novation, and so there will have to be a trial on these matters if Hart wants to recover payment of the sums ordered by the adjudicator.

Dacy Building Services Ltd v IDM Properties LLP

This looked to be a straightforward payment dispute when it was referred to adjudication but the key issue was who the parties to the contract were, as Matt explained at the time:

“The key issue was all about what took place at that Camberwell bus station and who said what. Did Mr McLoughlin agree with Mr Keran that Dacy would be working for IDM and would get paid by IDM (and which IDM company?). Or was Dacy working for HOC?”

When the matter came before Jefford J on enforcement, she held that IDM had a real prospect of succeeding in its defence, which was more than “fanciful”. However, the factual dispute was too complex to determine on a summary judgment application. The case turned on its own facts and evidence, and it was not clear who (if anyone) Dacy had contracted with. This was because the:

“… conduct of those involved points at different times in different directions and does not make it clear… what happened on 3 December 2015.”

When the matter came before Fraser J, after careful consideration of all the evidence (witness and documentary), he reached the same conclusion as the adjudicator (Mr Philip Eyre) had. The contract was between Dacy and IDM, and not Dacy and HOK, as that would be “verging on the commercially suicidal” when HOK already owed Dacy some £170,000 and it was common knowledge that it was in financial difficulties. This meant that some 18 months later, the adjudicator’s decision was finally enforced.

Fraser J also made the point that even if there is a question as to whether there is a contract at all, a trial with contested evidence given orally will very rarely be justified. It will usually be possible to resolve such issues summarily, and this case should not be seen as encouragement to parties to argue that a trial is necessary to determine issues that are directly relevant to enforcement. That was in keeping with the principle that the court should enforce an adjudicator’s decision, as Dyson J established all those years ago in Macob v Morrison. As Fraser J said near the end of his judgment:

“It must be remembered that adjudication decisions simply deal with the positions of the parties on an interim basis. The latitude to which Coulson J referred to in [Penten] will not lead to any permanent injustice.”

I read this as meaning that the new Judge in Charge of the TCC is clearly wanting to avoid a glut of arguments from parties trying to resist enforcement. For once, the court is trying to close the stable door before the horse has bolted! However, it appears to me to be in contrast to what Coulson J said last year in RCS Contractors Ltd v Conway, where he stated that a disputed oral agreement is unlikely to be successful in enforcement proceedings:

“… even if an adjudicator finds an oral contract, the responding party is likely… to obtain permission to defend a claimant’s claim on enforcement, because only rarely will a disputed oral agreement be the subject of a successful summary judgment application.”

I wonder which view will prevail or whether, as is so often the case, it will all depend on the facts.

MCMS Ltd Jonathan Cope

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