Plaiting and Nailing …

Ever tried to plait fog? How about nailing blancmange to the ceiling? Well, if you have, you will understand the feeling that adjudicators have been experiencing since 1 October 2011. That was the date when the Local Democracy, Economic Development and Construction Act 2009 (LDEDC) came into force granting adjudicators jurisdiction to resolve disputes in relation to all construction contracts regardless of whether or not such contracts are evidenced in writing.

First things first, the advantage of a written contract is that it provides certainty. Should any dispute arise, everyone has the same ‘rulebook’ in front of them.

Once you move away from that, tricky disputes are likely to arise regarding what comprises the contract. It is amazing how quickly good-will and mutual understanding evaporate once hard cash and points of principle are ‘on the line’.

There has been much focus on how adjudicators are going to unpick conflicting accounts of side-agreements and orally agreed on variations. That is right and proper as the forensic approach required to handle, present and evaluate such evidence may not come naturally to parties to the adjudication process. Don’t forget, lawyers have a role to play here!

However, one issue may have slipped under the radar. What if there is a question as to whether a contract has, in fact, been agreed upon? Failing to properly conclude contractual negotiations is surprisingly commonplace.

The most recent example was examined last month in Merit Process Engineering and Balfour Beatty Engineering Services.  In the first instance, the parties agreed on a letter of intent which allowed Merit to get on with certain works on agreed terms.  In the meantime, the parties intended to enter into a formal agreement governing the whole of the works. Upon reviewing the evidence, the Judge concluded that the progress of negotiations was such that the parties had agreed on everything saves for price.  The parties agreed that the contract sum was to be £1.6M and that the only difference between the parties related to whether the contract sum was inclusive or exclusive of the main contractors discount (at 2.5%, essentially the parties were £40k apart).  The Judge held that price was an essential term that cannot be regarded as either de minimis or otherwise non-essential and so no formal contract was held to have been concluded.

In the above case, the consequence of failing to conclude negotiations was fairly clear. The work carried out was governed by the letter of intent. However, what about situations where there is no letter of intent?

Unfortunately, the answer depends on the circumstances. Sometimes it is appropriate to salvage some aspects of a deal from the parties’ negotiations. In Clarke v ACT it was held that, whilst no ‘complex contract’ had been agreed, a simple agreement to carry out works for a reasonable price existed. This was referred to as a “contractual quantum meruit”.

You might instinctively be inclined to believe that such quasi-contractual situations lie beyond the remit of the Construction Act and outside the jurisdiction of adjudicators but Section 104 of the Act states that a “construction contract means an agreement for…. the carrying out of construction operations” (emphasis added).  It could be contended, therefore, that the above definition envisages a broad range of situations falling within the Act’s remit so long as there is some element of the agreement.

It is interesting that the Judge at first instance in Clarke v ACT spent 16 days hearing evidence from the parties before reaching the wrong (in the view of the Court of Appeal) decision as to the legal position following the failure of negotiations. In the context of the tight time constraints placed on the adjudication process, it is fair to assume that most adjudicators will have less than 16 hours to decide such things. They had better be ready for some frantic plaiting and nailing.