How adjudication will change
Andrew Hales provides a summary of the changes to the adjudication provisions of Part II of the Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”) and their likely impact on adjudication arising from the implementation of Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (“LDEDCA”) and the Scheme for Construction Contracts (England) Regulations 2011 (“Revised Scheme”), which came into force in England and Wales on 1 October 2011.
As we have said, only construction contracts entered into on or after 1 October 2011 will be affected. The three main changes to adjudication introduced by LDEDCA are:
(i) oral contracts can now be referred to adjudication;
(ii) “Tolent” clauses which provide that one party will be responsible for both parties’ costs of the adjudication have probably1 been outlawed.
(iii) a statutory slip rule has been introduced.
In addition, there have been a number of consequential amendments to the Scheme.
Contracts no longer in writing
One of the key changes to the HGCRA is that construction contracts will no longer have to be “in writing” to fall within its remit. This means that contracts that are (1) wholly in writing but have subsequently been amended orally, (2) partly in writing and partly oral, and (3) wholly oral, will become subject to the payment and adjudication provisions within the HGCRA (as amended). Certain adjudication provisions must be in writing under the HGCRA (as amended), so if a contract is concluded orally, or is partly oral, without all of the mandatory adjudication provisions being recorded in writing, the adjudication provisions of the Revised Scheme will apply.
The express intention behind this change was to widen the scope of eligibility to adjudication. The restrictive definition given by the Court of Appeal in the RJT case2 of what constituted a contract in writing served to exclude many, especially the smaller sub-contracts, from the adjudication process. Undoubtedly this change will lead to more parties being able to refer disputes to adjudication. Practically, it is likely that this change will also serve to increase the time and costs involved in dealing with the adjudication process.
A variety of new issues may arise as to (1) whether there was a contract in existence at all, (2) whether the oral element of the contract was incorporated into the written contract, and (3) what the terms of any oral contract are. Inevitably, Letters of Intent will also be contentious. This is likely to increase the range of issues to be resolved, and the amount of witness evidence that will be presented and tested, in adjudication proceedings. Typically, an adjudicator may well require a hearing to test the credibility of those witnesses before making a decision on the existence and/or terms of any contract.
To avoid the difficulties that will undoubtedly arise with oral or partly oral contracts, tender reviews, notes of pre-contract meetings, and all pre-contract discussions should be marked “subject to contract” to reduce the risk of a contract being created inadvertently. In Immingham Storage Company Ltd v Clear plc,3 the Court of Appeal held that the use of the words “a formal contract will then follow in due course” in an email accepting a signed quotation, did not mean that a binding contract had not been formed in circumstances where all essential terms of the contract had been agreed, the necessary internal approval had been obtained and, notably, the negotiations were not conducted “subject to contract”. Contracts can be created in circumstances where one party holds a genuine view that no formal contract was ever concluded and, following the Immingham case, it is more important than ever that the words “subject to contract” are used as standard.
Adjudication costs and Tolent clauses
Under the HGCRA, it was open to parties to agree who would pay the costs of the adjudication prior to service of the Notice of Adjudication (these clauses became known as “Tolent Clauses”). They had a tendency to act as a fetter to the statutory right to adjudicate “at any time” because they usually required contractors to assume responsibility for adjudication costs regardless of the outcome, a potentially onerous requirement given the wide range of issues that are typically raised and the level of costs that can be incurred in adjudicating. The HGCRA (as amended) and the Revised Scheme permit parties to confer power on the adjudicator to allocate and apportion responsibility for his own fees and expenses between the parties.
In so far as the parties’ own costs are concerned, the HGCRA (as amended) and the Revised Scheme only allow parties to agree liability for such costs following service of the Notice of Adjudication, albeit an apportionment would be very difficult to agree in practice in the midst of a dispute. However, the HGCRA (as amended) is notably silent on whether a single clause which (a) confers power on the adjudicator to allocate his costs between the parties and also (b) permits the parties to allocate responsibility for their costs prior to service of the Notice of Adjudication, would be lawful. Indeed, following the Scottish case of Elmwood v Profile Projects4 further doubt was cast on whether or not the amendment, as drafted, actually abolished such clauses for good. This issue will therefore probably fall to be considered by the Technology and Construction Court (“TCC”). Parties will probably try to circumvent the true intention of the LDEDCA (which was to prohibit Tolent Clauses), but the TCC has historically been reluctant to accede to technical arguments and, if the TCC were to follow the views already expressed by Mr Justice Edwards-Stuart in the Yuanda case,5 it would be more likely to support Parliament’s intention and strike out such a clause and bring a final end to Tolent Clauses.
The slip rule
The HGCRA (as amended) partially codifies the common law position in regard to slips which was established in Bloor Construction (UK) Ltd v Bowmer & Kirkland (London) Ltd,6 namely that an adjudicator can correct a slip in the decision arising from an accidental error or omission or clarify or remove any ambiguity in the decision within a reasonable time and without prejudicing the other party. The HGCRA (as amended) provides that a construction contract must include a slip provision in writing which gives power to an adjudicator to correct his decision so as to remove a clerical or typographical error arising by accident or omission. Unlike the common law position, the amendment does not refer to the correction of any ambiguity in the decision or the absence of prejudice to the other party. Further, the amendment does not impose a specific time limit unlike the Revised Scheme, where paragraph 22A(2) says that the decision must be corrected within five days of delivery of the original decision to the parties.
The Revised Scheme
The Revised Scheme will continue to apply where any of the adjudication provisions in the contract do not comply with the HGCRA as amended. There have only been minimal changes to the Scheme, for example, the slip rule at paragraph 22A(2) which can be utilised by the adjudicator on his own initiative or on the application of either party.
The Revised Scheme does amend the adjudication timetable slightly in that by paragraph 7(3) it requires the adjudicator to advise the parties of the date on which he received the Referral Notice. In accordance with paragraph 19(1), the date for reaching a decision will then be calculated from this date and not the date when the Referral was sent. This should reduce the risk of disputes arising over whether a decision has been published on time.
Finally, the Revised Scheme has also been amended to incorporate the changes made by LDEDCA in relation to costs and states that subject to any provision in a construction contract pursuant to section 108A(2) which deals with costs, the adjudicator may determine how his fees are to be apportioned. If a contractual provision does not comply with the HGCRA, this provision of the Scheme will apply.