Maintaining the balance: adjudicating oral contracts

Sep 27 2007 By The Journal

THE Housing Grants, Construction and Regeneration Act 1996 provides that parties involved in disputes arising under construction contracts in writing may refer those disputes to adjudication.

As part of its current review of the Act, the Government has proposed that the requirement for the contract to be in writing should be dropped.

Adjudication was intended to allow disputes to be resolved quickly. One of the reasons for this was to provide protection to the smaller companies operating within the construction industry who were often forced into insolvency while they waited for their disputes to be resolved through the courts. However, oral contracts are still relatively commonplace and, accordingly, the requirement that the contract be in writing can sometimes mean that the right to adjudicate is unavailable to those who are most in need of it.

Currently, an adjudicator is required to make a decision which implements the terms of the written contract. He may also have to decide whether there is an “agreement in writing” for the purposes of the Act. If adjudicators were required to act in relation to oral contracts then they would have to decide whether the evidence with which they were provided, suggested that there was a contract, and, if so, the terms on which the contract was made.

Objections have been raised to the Government’s proposal on the grounds that one reason for the introduction of the requirement, and a broad objective of the Act as a whole, was to improve contracting practice within the construction industry. After all, if a party still has the right to adjudicate on an oral contract, surely they are less likely to draw up a written contract?

This concern is something of a red herring. The Act has been in force for a long time now, but there are still businesses which rely on oral contracts. If the threat of losing the right to adjudicate has not prevented them from this practice over the past decade, then irrespective of whether the requirement stays or goes, it is unlikely they will change their business practices now. On the other hand, parties who do undertake written contracts are likely to be even keener to get everything down on paper in order to minimise the risk of allowing adjudications to arise on oral contracts where the adjudicator will decide upon the terms of the contract.

A greater concern with the proposal is that the requirement to decide the terms of the contract in itself might potentially increase the scope of the adjudicator’s jurisdiction so far that a fair and accurate decision cannot be reached within the time scales allowed for adjudication.

There is obviously an extension of the adjudicator’s jurisdiction inherent in the proposal. Undoubtedly, there are some cases where adjudicators will be able to reach their conclusions without too much difficulty. But where the issues are not straightforward and the adjudicator (who may not be a lawyer) has to listen to myriad technical representations concerning the formation of the contract, it is possible that mistakes may be made. This, in turn, may well lead to an increase in the percentage of matters decided in adjudications that go on to be litigated in the courts. Of course, it has always been acknowledged that adjudication can serve up rough justice but this has been balanced by the benefit of the protection the swift decision making process gives to those in the industry who most need it. If the Government’s proposals become law, it is hoped that allowing those who contract orally the right to refer disputes to adjudication will not tip this precarious balance.