Legal

Don’t let oral contracts leave a bad taste

7 September 2017 | By Stuart Thwaites

Wright Hassall legal director Stuart Thwaites examines if a ‘warning bell’ on oral contracts and adjudication will ring true.

Stuart Thwaites

As many readers will know, the Construction Act (the Housing Grants, Construction and Regeneration Act 1996) was amended by the Local Democracy Act (or to give it its full title, the Local Democracy, Economic Development and Construction Act 2009).

The changes gave adjudicators jurisdiction in relation to construction contracts that were not just in writing, but which may also be partly in writing and partly oral, or entirely oral in nature.

Previously only contracts evidenced in writing could be referred to adjudication. The legislative changes therefore expanded the disputes that could be referred to adjudication.

However, comments made by a leading Technology and Construction Court (TCC) judge in a recent case have cast a shadow, or at least a question mark, as to how beneficial that change will be in practice, in comparison to adjudication relating to contracts that are only evidenced in writing.

The case in question is RCS Contractors Ltd v Anthony Conway [2017] EWHC 715 (TCC). The hearing took place in April 2017. The Judge was Mr Justice Coulson. 

Building contractor RCS had taken Mr Conway to adjudication over unpaid monies. RCS was successful and was awarded £59,551.65. 

Mr Conway said, however, that the adjudicator did not have jurisdiction because there were three oral contracts, and not the one oral contract as contended by RCS. The significance of this is that only one dispute can be referred to adjudication. If there were three separate contracts there would need to be three separate adjudications (one under each contract).

If Mr Conway was right, it would have meant the adjudicator did not have jurisdiction, and so his decision would not be enforceable. 

When it came to enforcing the decision, Mr Conway was given permission by the court to defend the claim. However, the court said his defence was “limited to the sole ground that the adjudicator had no jurisdiction, because it is said that he has wrongly concluded that there was one construction contract for the works at the three sites”. 

In other words, RCS did not obtain summary judgment in the usual way when it came to enforcing the decision. For reasons that are not clear from the judgment, although the adjudicator’s decision was dated November 2015, and Mr Conway obtained leave to defend the claim on 6 May 2016, the case did not reach the TCC for the full trial of the defence to the claim until April 2017. 

It was common ground that there was no written contract, and that the Scheme for Construction Contracts applied. The issue before the court was a simple one. Was there, as RCS contended, just the one contract between the parties covering all three sites, or was there, as Mr Conway maintained, three separate contracts, one for each site?

In the adjudication Mr Conway was represented. This issue of one contract or three contracts was raised by him in the adjudication. The adjudicator gave his non-binding view that there was only one contract and, therefore, he had jurisdiction.

A potentially important feature of the case was that Mr Conway represented himself in the proceedings, and cross-examined RCS’s witnesses himself. The Judge said he had made some allowance for this, but nevertheless he formed the view that from Mr Conway’s perspective, Mr Conway regarded the words “contracts” and “sites” as interchangeable. That is an important point, because legally they are very different.

After hearing the witnesses on both sides and their cross examination, the Judge decided that on the balance of probabilities he preferred RCS’s case to that of Mr Conway. That is, that there was one single oral contract between the parties, covering the three different sites. 

In reaching his decision, the Judge took the following factors into account. He found RCS’s witness to be “honest and credible”. By contrast the Judge said that he “…did not find Mr Conway to be an entirely satisfactory witness”. Mr Conway raised matters which were irrelevant and ran arguments which were not open to him. He repeatedly referred to documents which had not been provided. 

The decision on the contract is not the key point of this article. Rather, the key point is the Judge’s comments at the end of his judgment, in which he expressed his regret that the Construction Act had been amended to allow all contracts to be the subject of adjudication, which therefore included oral contracts. 

He said the previous restriction under the Construction Act which limited the right to adjudication to only contracts evidenced in writing was “unthinkingly repealed”. It meant that “…adjudicators have now to grapple with entirely oral contracts, with all the uncertainty and contention that such a situation can engender.

“In addition, in such cases, even if an adjudicator finds an oral contract, the responding party is likely (as again happened here) 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.” 

He said that in this case, the result of the repeal of the changes to the Construction Act over oral contracts had resulted in a process lasting 16 months and incurring large costs. That is the opposite, he said, of the quick, cheap dispute resolution service that adjudication was intended to provide. 

If the Judge is right, then this is a warning bell to adjudication involving oral contracts.

Although it seems that part of the 16-month period the Judge referred to was down to delay by the parties in moving the case forwards, it still resulted in a significantly longer and more expensive process than would normally be the case.

The TCC has a well-oiled procedure for enforcing the decisions of adjudicators, where they aim to have a hearing within four weeks of court proceedings being issued. 

What the Judge has said in this case, which is not binding on other Judges, but rather of “persuasive quality”, is that it will be difficult to obtain summary judgment in respect of adjudicator’s decisions concerning oral contracts where the oral contract is disputed. 

This is because there would need to be a full hearing or trial involving witnesses giving evidence and cross examination. As the Judge rightly notes, that is the opposite of the quick and relatively cheap dispute resolution process that we have all come to expect from adjudication.

Time will tell as to whether the courts take a similar approach in future adjudication enforcement cases involving oral contracts.

Stuart Thwaites is a legal director at Wright Hassall in the firm’s construction and engineering team. He can be contacted on stuart.thwaites@wrighthassall.co.uk  or 01926 884690. 

Main image: Psisaa/Dreamstime

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