UK: Adjudication Review, Spring 2018

Our latest adjudication review considers recent cases dealing with the adjudication timetable and extensions of time, the problems that arise when adjudicating parties are relying on an oral contract and declaratory relief applications.

THE IMPORTANCE OF COMPLYING WITH THE ADJUDICATION TIMETABLE

The Technology and Construction Court (TCC) has reminded parties – and adjudicators of the importance of engaging when asked for an extension of time and of complying with the adjudication timetable.

In Baldwin and another v. Pickstock Ltd [2017] EWHC 2456 (TCC), the claimant, Mr Baldwin (the adjudicator), had been appointed as adjudicator in an adjudication in which the defendant, Pickstock Ltd (Pickstock), had been the referring party. The adjudication was subject to the Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649) (the Scheme).

For various reasons, including a jurisdictional challenge, the adjudicator needed more time to deliver his decision. He asked the parties for various extensions on which there was correspondence from all involved. The responding party agreed to the final extension, to 7 June, but Pickstock (through its solicitors) remained silent. Pickstock's solicitors later advised that they could not get instructions on the extension request. Given the timing, the adjudicator stopped work before reaching a decision. He resigned on 9 June and claimed £28,303.92 for his fees from Pickstock.

In the subsequent TCC proceedings, the adjudicator's claim for those fees failed. The judge held that Pickstock had, by failing to respond to the adjudicator's extension request, effectively agreed to the 7 June 2016 extension for the delivery of the decision. Unfortunately, the adjudicator's resignation, coming two days after that deadline, was therefore ineffective: his position as an adjudicator had already lapsed on 7 June and he had lost the right to claim his fees.

There are lessons for both adjudicators and parties here.

Adjudicators must reach their decision within the timetable

Adjudicators are subject to an absolute obligation to reach their decision within the timescales permitted under the Scheme. They have no jurisdiction to extend the deadline without the express agreement of the parties.

The judge referred to Cubitt Building & Interiors Ltd v. Fleetglade Ltd [2006] EWHC 3413 (TCC) in which Coulson J stated that a decision given "out of time and without an agreed extension may well be a nullity", and a "failure to complete within the agreed period [represents] a complete failure on [the adjudicator's] part to discharge [his] functions at all".

In Baldwin, the adjudicator's terms and conditions enabled the adjudicator to resign "at any time" before reaching his decision if his jurisdiction was validly challenged. In such a scenario, he was entitled to his fees and expenses from the referring party. However, on the facts, "at any time" meant the adjudicator could only resign up to the time and date he was due to deliver his decision: that is, while he still had power to act as an adjudicator. After that date, his appointment lapsed and there was nothing to resign from.

The judge was slightly baffled as to why the adjudicator had not resigned before 7 June 2018 given what he knew of Pickstock's position. He did, however, note that Pickstock's conduct, through its solicitors, may have been designed to "run the clock down" towards the decision deadline – which he regarded as "reprehensible". The fact remained that, had the adjudicator resigned before midnight on 7 June, as he was entitled to do in the circumstances, then "the outcome would have been very different": he would have recovered his fees.

A party's silence, in the face of an adjudicator's request for an extension, can amount to agreement

In Baldwin, the latest extension agreed to (by implication) by Pickstock had been 27 May 2016. The adjudicator's further request for an extension to 7 June 2016 was needed partly because the adjudicator needed time to consider a further submission by Pickstock. Pickstock knew that and the court concluded it was therefore "incumbent on [Pickstock] to make its position clear by responding to [the adjudicator]". Without that response, the adjudicator was entitled to treat Pickstock's silence as agreement to the date of 7 June 2016.

Parties should endeavour to respond to requests for extensions and give reasons for any refusal in a timely fashion. Failure to do so may give rise to an inference that the failure to respond at all or adequately is a tactical manoeuvre to "run the clock down".

Practical points for adjudicating parties arising from Baldwin

• Ensure you confirm any agreement relating to the adjudication timetable in writing.
• If you do not respond to an adjudicator's request for an extension, the adjudicator may, depending on the facts, be entitled to treat your silence as consent.
• An adjudicator does not have to press you for a response to an extension request. An adjudicator's entitlement to rely on silence as consent to an extension request will be stronger where the silent party causes or contributes to the need for an extension of time.
• An adjudicator's powers and his/her appointment in the adjudication lapse (under the Scheme) after the decision is delivered – or is due to be delivered. Any resignation after that date is ineffective.
• In each case where a request for an extension is ignored, the question of whether there is implied consent will depend on its facts. The judge noted that the TCC applies this "doctrine of acquiescence" robustly "as an aide to validating the adjudicator's continued appointment". In other words, those who seek to use their silence as a means to blur the timetable or waste valuable time in the lead-up to the decision deadline, may find the TCC later upholds the requested extension.

THE PROBLEM WITH ORAL CONTRACTS WHEN IT COMES TO ADJUDICATING A DISPUTE

Despite a steady stream of cases showing the problems created by oral contracts, parties continue to get started on projects without committing the terms to writing. While parties can now adjudicate on disputes arising from oral construction contracts, an oral contract can make the adjudication process longer and more expensive.

In Dacy Building Services Ltd v. IDM Properties LLP, the Technology and Construction Court (TCC) had to establish whether the parties had indeed entered into a binding oral contract: a process which ultimately involved one adjudication and two sets of court proceedings.

Since changes were made to the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) in 2011, parties have been able to refer disputes arising out of oral construction contracts to adjudication. Undoubtedly, these changes have created practical difficulties for adjudicators. In cases involving a disputed oral contract, adjudicators now have to wrestle with potentially complex issues as to whether a construction contract has been formed (and its terms) before moving on to the dispute itself (such as non-payment). Adjudicators must decide on the "is there a contract" question and adjudicate the dispute within 28 days (unless extensions are agreed), all the time knowing that their jurisdiction is under challenge. It was for these reasons that the original, 1996 version of the Construction Act excluded oral contracts.

Post 2011, Coulson J suggested in Penten Group Ltd. v. Spartafield Ltd [2016] EWHC 317 (TCC) that courts would take a more generous view of the scope of an adjudicator's jurisdiction where an oral contract was involved. That approach has now been confirmed in Dacy Building Services Ltd v. IDM Properties LLP: [2018] All ER (D) 124 (Mar), by Fraser J who agreed that the court should exercise latitude when considering an adjudicator's decisions on the existence/terms of an oral contract. Such decisions, being binding until final determination, are made on an interim basis only and would not therefore lead to permanent injustice.

Dacy involved an all too familiar scenario in which the main contractor had become insolvent and a new sub-contractor (the claimant (Dacy)) was hired (orally, during a meeting) by the defendant IDM Properties LLP (IDM) to finish off some of the works. Three of Dacy's subsequent invoices were paid but the final three were not. Dacy took its claim for payment to adjudication and, at this point, IDM claimed that Dacy's agreement was with the main contractor not IDM.

IDM challenged the adjudicator's jurisdiction by arguing there was no [oral] construction contract as defined by the Construction Act. Without a construction contract, there would be no dispute capable of being adjudicated, the parties would have no right to adjudicate, the adjudicator would have no jurisdiction and any decision would be unenforceable in court.

The adjudicator's conclusion

The adjudicator upheld Dacy's version of the facts: that Dacy had agreed to carry out the works for IDM during a short meeting in a bus shelter with a representative of the main contractor present. The adjudicator found there was an oral construction contract with IDM and ordered IDM to pay up.

Dacy had to take the decision to the TCC for enforcement which IDM resisted on the basis that the adjudicator had no jurisdiction to act (arguing there was no contract between Dacy and IDM).

The TCC judge, Jefford J, concluded that IDM had a realistic prospect of succeeding in this defence. She ordered that there should be an expedited trial on whether there was a contract with a time estimate of one day.

The matter then came before Fraser J in the TCC who, unlike the adjudicator, had to review all the evidence on whether there was an oral contract between Dacy and IDM. Like the adjudicator, Fraser J concluded there was an oral contract.

Practical points arising out of Dacy

• Oral contracts and/or their terms can be difficult to prove and can lead to expensive, multiple, legal proceedings. (In Dacy, the parties had to work through three separate sets of proceedings to reach a conclusion.)
• Adjudicators necessarily have to decide complicated and fact sensitive contract issues in tight timescales when compared to the time afforded to the courts. They may, because of the shortage of time and limited evidence available, reach the wrong decision in the short term: one that might need court or arbitration proceedings to correct. In the interim, however, the court will uphold the adjudicator's conclusion on the contract.
• If disagreements arise in relation to works agreed orally, differing views and memories of what has been agreed – or indeed whether there is any agreement at all – can lead to an expensive dispute. Not only that, disputes arising out of oral agreements can make the adjudication process more complex.
• A written contract with key terms set out clearly will simplify the adjudication process (and indeed reduce the scope for disputes in general). The adjudicator will be able to move straight to consideration of the dispute. Failing that, full and contemporaneous notes or correspondence can assist in demonstrating what was agreed at the time.

Words of caution about doing deals in the aftermath of insolvency

Construction sites after a significant insolvency can induce desperate measures. As the judge in Dacy explained:

"[After the main contractor's insolvency ... ] The parties realised at that time ... – that a new way of working would have to be sorted out for any progress to be made on the Project. [The main contractor] could not pay its sub-contractors. The traditional model of main contract, and observance of the usual payment framework in a standard form contract, had essentially broken down and work packages were only partly completed. New sub-contractors could not be given a fully worked out work scope in advance of agreeing a fixed price, for example, because nobody knew what the work scope was, because the work packages were only partially completed.[Paragraph 54 of the judgment]."

Given the all too familiar, insolvency-related, circumstances in which Dacy and IDM agreed terms, the decision in Dacy should act as a deterrent to all those minded to reach a commercial agreement on site without any supporting paperwork. In the build-up to an insolvency, when cash flow is slowing down and, in the immediate aftermath of an insolvency, main and sub-contractors can disappear from a project overnight. Those in control of the project then need to replace site labour quickly. This urgency increases the chances of an oral contract being agreed with no or little documentary record or evidence of the agreed terms.

In this situation, those agreeing to do works should always follow up any discussions (wherever held) with a written confirmation of the key terms agreed relating not only to the identity of the contracting parties, the scope of works, required completion timescales/programming, the agreed price (or rates) but also the payment terms, insurance liabilities and, depending on the facts, exclusions of liability, for example, for others' works.

Enforcement refused: insufficient evidence on oral contract to prove novation

Another recent TCC decision, in which an oral contract gave rise to problems in enforcing an adjudication, is M Hart Construction Ltd and another v. Ideal Response Group Ltd [2018] EWHC 314 (TCC).

In this case, the dispute arose in relation to works at the now old, Olympic Athletics Village. The judge thought the contractual arrangements between the various parties involved were "to say the least, informal". The subsequent disputes that arose from those arrangements were complicated by the fact that the contracts were oral: little of what the parties had agreed had been reduced to writing.

The claimants had sought payment on unpaid invoices and had successfully obtained three adjudication decisions to recover those payments. The defendant (Ideal) refused to pay and the claimants were forced to seek summary judgment in enforcement proceedings in the TCC.

Ideal resisted the enforcement proceedings by questioning the adjudicator's jurisdiction to act based on whether the claimants were the correct party in the adjudications. Ideal argued that its original oral contract was with Mr Hart as a sole trader but when Mr Hart incorporated his business to create M Hart Construction Ltd (the first claimant) he had not validly novated the contract (whether orally or impliedly) to the first claimant. A valid novation would mean that the first claimant effectively stood in Mr Hart's place in the contract with Ideal. This would create new contracts between Ideal and the first claimant (provided all the parties had consented to that novation) and would mean that the adjudicator had had jurisdiction to reach the three decisions.

Unfortunately for the first claimant, the TCC found insufficient evidence to establish that the alleged novation had taken place. The court held that Ideal had a real prospect of defending the claims on the basis that it had not consented to the novation. As a result, the TCC enforced only one of three adjudication decisions in the claimants' favour.

The judge quoted from RCS Contractors Ltd v. Conway [2017] EWHC 715 (TCC): "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."

Again, this decision shows the difficulties that oral contracts can create for those trying to enforce adjudication decisions.

JUDICIAL CALL TO SEEK DECLARATORY RELIEF UNDER CPR PART 8 ONLY WHEN APPROPRIATE

The statutory adjudication process was designed to deal swiftly with simple disputes arising from construction contracts to allow the parties to get on with the project. The courts support that process wholeheartedly and the Civil Procedure Rules (CPR) provide a number of routes for parties to seek the Technology and Construction Court (TCC)'s assistance in relation to adjudication matters. In particular, parties can seek:

• enforcement of adjudication decisions (and a monetary judgment) using CPR Part 7 (together with an application for summary judgment under CPR 24), as recommended by the TCC Guide (see paragraph 9). Part 7 normally involves the submission of factual and expert evidence and a hearing; or
• declaratory relief under CPR Part 8, at the court's discretion, on discrete issues arising out of the commencement of a disputed adjudication where the parties are in substantial agreement about the facts. Part 8 enables the parties to obtain a judicial decision or declaration on a crucial issue – one that goes to the core of a substantial part of the dispute.
• Unsuccessful parties can also use Part 8 to challenge the validity of the adjudicator's decision. For example, after receiving an adjudication decision, the unsuccessful party who intends to resist its enforcement could seek a Part 8 declaration that its defence to the anticipated enforcement proceedings is valid. Such a declaration could help resolve the whole or most of the dispute, could reduce the need for further adjudication or court proceedings and, ultimately, save costs.

While Parts 7 and 8 are, in some cases, essential tools to help resolve disputes efficiently, the courts have voiced concerns that Part 8 is increasingly being used inappropriately to deal with issues unsuitable for that process. In a couple of recent cases, the TCC has made it clear that parties must be careful to choose the correct procedure to resolve the issue in question.

An issue related to adjudication proceedings is not necessarily suitable for expedited, declaratory relief proceedings

In Merit Holdings Ltd v. Michael J Lonsdale Ltd [2017] EWHC 2450 (TCC), the parties had been involved in two sets of adjudication proceedings. When a third reference was made to adjudication, the claimant, believing that the adjudicator had reached the wrong decision in the previous adjudications, sought a declaration from the court on the correct interpretation of the contract using the CPR Part 8 procedure. This was not therefore a claim related to the commencement of the adjudication: it related to the substance of the decision in the previous adjudication. The claimant wanted to prevent the same error being repeated by the third adjudicator.

The claimant presented the issue as if it were "adjudication business" in the TCC Guide, paragraph 9 sense. Accordingly, the TCC dealt with the procedure for handling the matter (including the directions, time estimates and court listings) in an expedited manner. When the parties came to court, it became clear that the application, while related to the previous adjudications, was not "adjudication business" as such.

After hearing the claimant's explanation as to why the issue had been represented as adjudication business, the judge, Mrs Jefford J DBE, recognised that, generally speaking, a judicial resolution of an issue under Part 8 might avert a series of adjudications being conducted on the wrong basis. However, she stressed that the use of CPR Part 8 for declarations relating to "adjudication business" was not appropriate for every dispute with an adjudication background. A party cannot assume that Part 8 is appropriate just because the issue has some relationship to an adjudication and an adjudication label.

"The experience of this court shows that there is a real risk of the Part 8 procedure being used too liberally and inappropriately with the risks both of prejudice to one or other of the parties in the presentation of their case and of the court being asked to reach ill-formulated and ill-informed decisions."

Jefford J had reservations about dealing with the issue (which seemingly involved substantial issues of fact) in a short hearing with only limited evidence: she felt "acute ... discomfort" at resolving issues "in a complete vacuum of evidence". While she did go on to give a declaration about the nature of the parties' contractual relationship, she made clear that she exercised her judicial discretion only because the relevant facts were short and uncontentious and the defendant had not identified other facts on which they wanted to rely.

Jefford J's judgment shows that the court is prepared to exercise its discretion to use the expedited procedure to avert unnecessary costs and expenses but will not be prepared to stretch the scope of Part 8 to deal with claims involving disputes of fact clearly unsuitable for that process.

Practical point

• Parties who use the Part 8 procedure to seek a declaration must ensure that the question for the court "is framed with some degree of precision and/or be capable of a precise answer" and be one unlikely to involve a substantial dispute of fact.

An example of the types of issue suitable for Part 8 proceedings

The decision in BHC Ltd v. Galliford Try Infrastructure Ltd (t/a Morrison Construction) [2018] EWHC 368 (TCC) is a useful example of the type of issue that the court considers suitable for consideration using the expedited Part 8 procedure.

The defendant (Morrison) had been employed to carry out civil engineering works as a sub-contractor at a gas processing plant in Shetland. Morrison employed BHC as a sub-sub-contractor to carry out the structural steel, cladding and flooring works. During the project, 33 additional buildings were instructed by change order instructions (COIs) and a dispute arose as to the basis on which those works carried out and how payment was to be calculated for those works.

BHC sought a declaration under CPR Part 8 that the COIs were issued and payable on a re-measurement basis rather than on a lump sum basis. Morrison argued that the Part 8 process served no useful purpose in this case: that only £1.2 million of the total £10 million claim would be resolved, that the substantive valuation issue in dispute did not turn on the interpretation of the COIs and that the declaration sought would not assist in its resolution.

The court disagreed and held, in this case, that declaratory relief was an appropriate procedural route to take: the parties' valuations on this issue differed by over £1 million (so justifying a day's hearing) and the parties would benefit from knowing the basis on which to value the works so that they could focus on the valuation exercise and reduce the scope of the dispute.

Practical points

• When considering whether to grant a declaration or not, the court will take into account justice to both the claimant and the defendant, whether the declaration would serve a useful purpose and whether there are any other special reasons why or why not the court should grant the declaration.
• Each case necessitates a fact-sensitive assessment of the benefits and disadvantages of the relief claimed.

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