Oral contracts need to be covered by the Construction Act

A frequent basis for challenging an adjudicator’s jurisdiction is on the grounds that no written contract exists. BCSA Legal and Contractual Affairs Director Marion Rich calls for a change in the law to bring part-oral and part-written contracts within its scope.

It is a few years now since the Court of Appeal transformed our understanding of s.107 of the Construction Act (Part II of the Housing Grants, Construction and Regeneration Act 1996) in the case of RJT Consulting Engineers Ltd v DM Engineering (Northern Ireland) Ltd [2002] BLR (‘RJT’). This whole issue has been discussed before in New Steel Construction (May/June 2002 and Nov/Dec 2004) but no apology is needed for revisiting it: it is a vital issue for the whole of the construction industry.

To remind you, 107 is the clause that requires a construction contract to be evidenced in writing before the Construction Act applies to it. The plain wording of s.107 is so comprehensive that the widely-held view before RJT was that only wholly oral construction contracts would be outside the scope of the Act and that by far the majority of construction contracts would be covered.

In RJT, however, the Court of Appeal held that it was not merely the existence of a contract that had to be evidenced in writing but all of the terms of the contract (or possibly, all of the relevant terms).  Difficulties arise because, as we are all aware, many, many contracts in the construction industry – perhaps most – are not fully reduced to writing.

So far, the answer of the courts to this problem remains that given by Her Honour Judge Frances Kirkham in Debeck Ductwork Installation Ltd v T&E Engineering Ltd TCC 14 October 2002:

‘[Counsel] asks rhetorically what a claimant is to do in these circumstances if it wishes to obtain the benefit of the protection of the Act. It seems to me that the answers are quite straight forward. A contractor can require a contract to be reduced to writing. A contractor can at some later stage clarify the terms which he believes have been orally agreed and invite the other contracting party to agree that those are indeed the agreed terms of the agreement’

So Kirkham J’s answer is two-fold:

• A contractor can require a contract to be reduced to writing (presumably at the time the agreement is made), or
• A contractor can at some later stage clarify the terms he believes to have been agreed and invite the other contracting party to agree.

The second part of the answer is particularly interesting: what happens if a party simply ignores the request to agree for whatever reason? It appears that the first party will be left at the will of the other. It will have a contract other than in writing, unable to avail itself of the benefits of the Construction Act – unless the other party judges it worth its while to change its mind later.

But even the first part of Kirkham J’s advice is a counsel of perfection and takes no account of the relative commercial strengths of the contracting parties. Yes, we should be encouraging proper documentation to be made and kept; but in the meantime, organisations should not be denied recourse to adjudication.

Policy

In Grovedeck Ltd v Capital Demolition Ltd [2000] BLR, His Honour Judge Bowsher QC gave a policy reason behind the approach of the courts (this was quoted with approval by in RJT):

‘…disputes as to the terms, express and implied, of oral construction agreements are surprisingly common and are not readily susceptible of resolution by a summary procedure such as adjudication. It is not surprising that Parliament should have intended that such disputes should not be determined by adjudicators under the Act…’

What are the problems?

Anecdotally, adjudicators report that their jurisdiction is now invariably challenged on the basis that the contract does not display a sufficient degree of writing.

It is clear that most challenges of this type can be easily dealt with by a robust adjudicator and indeed this was the wish of Lord Justice Ward in RJT. Adjudication, he said, would be ‘emasculated’ if a party were able to deprive the adjudicator of his power simply by putting up an argument that some term was or was not incorporated into an agreement otherwise accepted to be in writing.

This is all very well but referring parties and adjudicators are left in the position whereby yet another argument has to be understood, refuted and tested before ever the substantive dispute can begin to be dealt with. One of the recurring themes of the Specialist Engineering Contractors’ Group’s research with its member companies has been that the cost of adjudication is increasing. One powerful way to reduce the cost of adjudication is to limit the number of arguments extraneous to the substantive dispute. These arguments cost money to investigate, argue and decide but they add nothing to the process.

And, of course, where adjudicators do act robustly, judges do not always agree – one example of this is Lloyd Projects Ltd v John Malnick (TCC 22 July 2005) where the judge agreed with the respondent that extra terms had been agreed orally, outside an ostensibly wholly written contract.

Construction Act Review

For the purposes of the review, working groups were set up to prepare reports for Sir Michael Latham’s Review Group.  Some of the discussions between the various different interest groups represented became very animated. There was one issue however on which everyone involved in the industry was agreed, without exception: that the decision in RJT was harmful and had to be changed, by legislation if necessary.

The consultation document prepared by DTI, however, was extremely disappointing in its response to this very strong recommendation – it merely noted:

‘…we do not intend to consult on amending Section 107 of the Construction Act…’

and, later in the document,

‘We accept the Court of Appeal’s interpretation as appropriate in the context of adjudication.  It is essential that the adjudicator can identify easily the terms agreed between the parties.  Time spent arguing over such terms would wholly undermine the intention of this statutory adjudication process.’

This would not be an unreasonable line to take if in fact it meant that arguments had been reduced by the decision. This is not the case, as pointed out above.  Much more realistic was the comment made by the adjudicator in Lloyd v Malnick, John Riches of Henry Cooper Consultants Ltd, that ‘it would be a darn sight easier to deal with oral contracts than to wrestle with some of the jurisdictional issues that arise.’

Despite the policy behind the courts’ and DTI’s approach, there is no inherent reason why wholly oral contracts should not fall within the scope of the Construction Act: the New Zealand legislation (the Construction Contracts Act 2003) applies to both written and oral contracts and has not seemingly given rise to any particular difficulties.

It is also worth remembering that s.107 is in the same terms mutatis mutandis as s.5 of the Arbitration Act, which was drafted to encourage wide use of arbitration; it seems to have been successful in doing so.  Perhaps it is unfortunate that such similar words are interpreted differently when they appear in the Construction Act.

Conclusion

Whether RJT Consulting was correctly decided or not – and it strains the meaning of parts of s.107 to breaking point – there can be no doubt that it has caused and continues to cause great difficulty, inconvenience and cost to the construction industry.

The construction industry frequently works in an informal manner, the more so the smaller the party.  The smallest parties are those least able either to have the specialist knowledge to realise that all the terms (or all the relevant terms) must be in writing or to be able to impose such a requirement in their dealings with other, more powerful, contractors.  It is thus these small contractors that are most likely to require the protections that the legislation provides and simultaneously the least able to ensure that they obtain them.

The answer is to change the legislation to make it clear that part-written, part-oral contracts come within its scope. Most in the industry are surprised that there is even any argument about this.