The one mantra that aptly describes the intention behind the introduction of statutory adjudication is 'pay first and argue later'. It captures the intention of parliament to ensure that cash flow in construction projects was not interrupted due to disputes while projects are on-going. Adjudication provides a relatively quick - 28 days timetable (with a possibility of a 14 day extension on the consent of the referring party) for interim resolution of disputes. The mechanism is founded on the premise that parties would pay whatever sums are determined as due by the adjudicator with the option of final resolution of such disputes at the completion of the project by agreement or litigation or arbitration.

Because of the tight timetable for adjudication of disputes and also borrowing a leaf from the wording of the Arbitration Act, section 107 of the Construction Act 1996 provided that only contracts in writing were covered by the Act. Thus section 107(1) provided that:

'The provisions of this part apply only where the construction contract is in writing, and any other agreement between the parties as to any matter is effective for the purposes of this Part only if in writing'

In the case of Grovedeck v Capital Demolitions Ltd [2000] BLR 181, Bowsher J commented on the need for certainty of terms (which is absent in oral contract dispute) to enable successful resolution of disputes within the summary procedure and tight timetable for statutory adjudication:

'Disputes as to the terms ...of oral construction agreements are ...Not readily susceptible of resolution by a summary procedure such as adjudication'

This thinking was also affirmed by the Court of Appeal in RJT Consulting Engineers v DM Engineering (NI) [2002 1 WLR 2344 where it was stated thus:

'...Certainty is all the more important when adjudication is envisaged to have to take place under a demanding timetable. The adjudicator has to start with some certainty as to what the terms of the contract are'

Therefore the Construction Act 1996 limited its application and by extension the adjudication procedure it introduced to written contracts. On October 1, 2011 when the amendments to the Construction Act came into effect in England and Wales (and subsequently in Scotland and only just recently in Northern Ireland ), this seemingly correct position was jettisoned and oral contracts and partly written contracts fold are now covered under the Act.

Why Oral Contracts?

The requirements that contracts had to be in writing before they are covered by the Act immediately ran into a definition problem barely two years after the Act commenced. The tendering practice commonly used by the industry involves an indication of the standard form of contract that will be used for a project during the invitation to tender stage, while negotiations on bespoke amendments to that standard form to make it suitable for the particular project is undertaken after tenders have been received. It is the process of agreeing to these bespoke amendments that often drags on and as indicated by the NBS National Construction Contracts and Law Survey less than two thirds of construction contracts are signed before work commences and an alarming four per cent are signed after completion or not at all.

The question of what was sufficient to satisfy the requirement that the contract had to be writing or evidenced in writing before it was covered by the Construction Act became an important one. The Court took up this question in RJT Consulting Engineers v DM Engineering (NI) [2002 1 WLR 2344 and came to the conclusion that the entire contract had be in writing: 'On the point of construction of section 107, what has to be evidenced in writing is, literally, the agreement, which means all of it not part of it'

When this decision was followed and explained further in Carillion Construction v Davenport Royal Dockyard [2003] BLR (TCC) to mean that the right to adjudication could be lost if there was an oral variation of a written contract (where such oral amendment was not recorded in writing), the magnitude of the possible lacuna created by a strict interpretation of s107 became evident. Many feared that the policy of adjudication would be undermined by this approach and the industry seemed prepared to consider changes to the rule requiring construction contracts to be in writing before they were covered by the Act.

During the 2004 review of the Construction Act chaired by Sir Michael Latham, a majority of interest groups seemed inclined to support an extension of the provisions of the Act to partly written contracts but seemed unwilling to go the full hog and extend it to wholly oral contracts. However, by the time the government's second consultation on the proposed amendments were published in 2008, over two thirds of respondents supported a complete removal of the requirement that construction contracts should be in writing or evidenced in writing.

Partly Written and Oral Contracts

The amendments by the Local Democracy, Economic Development and Construction Act 2009 abolished s107 of the Construction Act 1996 and paved the way for the admission of partly written and oral contracts under the Act. The only element of a construction contract that is still required to be in writing is the adjudication procedure; however this is not a major issue because construction contracts without an adjudication procedure or a defective adjudication procedure will have the adjudication procedure set out in the relevant Scheme of Construction Contract apply to it.

The Department of Business Enterprise and Regulatory Reform (BEER) Impact Assessment report published in 2008 on the estimated effect of the amendments, estimates that 15% of claims in England and Wales revolved around whether the construction contract was in writing or not, and the abolition of the requirement for the contract to be in writing saves the industry about £187,500 with savings also projected for Scotland. This is corroborated by findings of The Technology and Construction Solicitors Association which found that, of 154 enforcement cases they considered, 23 (or 15%) related to whether the construction contract was in writing.

Although the industry has now adopted oral contracts under the Act, the initial arguments vis-a vis the timetable for resolving matters refereed to adjudication still remains. In fact the lack of a widely accepted/adopted procedure makes it imperative that parties and adjudicators taking up disputes emanating from oral contracts prepare to deal with the salient issues raised by the nature of their agreement.

Practical Advice

It is expected that in the next few years there will be an increase in disputes emanating from oral contracts and oral variation to written contracts. These disputes will raise questions as to time, content and parties to the alleged contractual arrangements. Other questions will include the proper procedure to be adopted by the adjudicator, the type of case management and directions to be issued, the procedure to test factual averments and possible changes to the procedure for enforcement proceedings before the Technology and Construction Courts (TCC).

Below is our opinion on the best practice to follow when faced with a possibility of a dispute arising from an oral construction contract or a partly written construction contract:

  • It is still best practice to have a signed written contract. This should be the aim of all parties. In the current regulatory environment, ensure that all communications not intended to be binding are marked 'subject to contract'. All important oral communications that that has an appearance of creating contractual relationships should be reduced to writing and marked as 'subject to contract' where appropriate.
  • When referring a dispute that is based on an oral or a partly written contract to adjudication, ensure that the facts supporting your averments on the existence of an oral contract or variation are set out clearly in your referral notice. This may require including witness statements, this is important because failure to follow this rule could be a ground for the responding party to challenge the process on natural justice grounds i.e. failure to be properly informed of the case against them.
  • Where the responding party intends to challenge the existence of the contract and by extension the jurisdiction of the adjudicator, it is important to reserve the right of challenge from the onset. It is also advisable under current regulations that leading stakeholders in an organisation keep contemporaneous notes of meetings and engagements; this could serve as counter evidence during the consideration of a case surrounding the existence of an oral contract.
  • The adjudicators would probably be the busiest of all the stakeholders at the referral of a dispute based on an oral or partly written contract. Some of the issues would include:
    • Does the referral of a dispute which may include a disagreement on the existence or terms of an oral or partly written contract along with the main issue in dispute create more than one dispute for the adjudicator to consider? Under the Scheme of Construction Contracts the adjudicator has jurisdiction to consider one dispute at a time. Where the Scheme applies, the adjudicator would need to consider whether it requires an extension of jurisdiction by the consent of the parties to consider two disputes.
      Alternatively following the broad view the courts have taken in determining what constitutes a single dispute, the adjudicator may choose to treat the existence and terms of the contract as a preliminary issue before moving to the substantive dispute.
    • Another issue would be whether the referral notice has sufficiently particularised the exact terms of the contract claimed. Where it has not the adjudicator should issue directions to ensure it is described sufficiently for the other party to have notice. A cue could be taken from the Civil Procedure Rule which requires that for claims on an oral agreement, the particulars of claims should set out the contractual words used, the stage it was made, by whom and to whom and the location where they were spoken.
    • Another issue would be the procedure to be adopted for the adjudication. The adjudicator would need to consider whether a meeting of the parties is required. It is important that the evidence regarding the existence of the contract is properly tested as that the proceedings does not to fall foul of the rules of natural justice.

Other Amendments

Slip Rule: This rule allows the adjudicator to correct clerical or typographical errors arising by accident or omission within a reasonable time after the delivery of its decision. For those contracts covered under Scheme, the period is five days. It had already been held in English case of Bloor Construction v Bowner [2000] BLR 764, that such right existed at common law and was implied into the contract and therefore such errors could be corrected either at the adjudicator's own initiate or by application by the parties. This amendment codifies the common law rule and makes applicable in all of the UK.

Tolent clauses: The amendments to the Act prohibit Tolent clauses. Tolent clauses became part of the construction vocabulary after the decision in the case of Bridleway construction Ltd v Tolent Construction Limited. The decision upheld the validity of clauses where one party agrees to pay the other party's cost for any adjudication commenced whether they win or not.

The decision had already come under some criticism and was not followed in Re: Yuanda (UK) Co Ltd, where it was suggested that such clauses were inconsistent with the Act since it served to discourage adjudication and was therefore inapplicable. This amendment ensures that the prohibition on Tolent clauses is now statutory and applies to all of the UK.