When an interim decision becomes binding

Will Buckenham,  8th October, 2015

Both Section 108 of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) and Paragraph 23 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (“the Scheme”) make it clear that adjudicators’ decisions are binding upon the parties unless the dispute is then later determined by legal proceedings, arbitration or agreement.

Decisions are deemed “interim” or “temporarily” binding, though often the parties will leave the dispute at the adjudicator’s decision and simply move on.

However, are there circumstances where an adjudicator’s decision might instead be “finally binding” on the parties?

Gosschalks Construction Law solicitor, William Buckenham, takes a closer look at a recent construction dispute case and the conclusions that can be drawn from it.

Khurana and Khurana v Webster Construction Limited [2015] EWHC 758 (TCC)

A dispute had arisen regarding the final account for works carried out at a property in Cheshire.

As the property was residential, the Act did not apply (see section 106 of the Act), and whilst the contract between the parties contained a dispute resolution procedure, this was both unclear and uncertain (described by the Court as more of an agreement to agree).

To resolve the dispute, Webster proposed that the parties adjudicate the matter, with an independent surveyor being appointed as adjudicator.

Whilst the contract was silent as to the relevant procedure to be adopted, it was proposed that the adjudication should be conducted in accordance with the Scheme “… save that the decision of the independent structural quantity surveyor shall be binding on the parties."

The Khumaras responded, confirming their agreement to the appointment of a quantity surveyor in accordance with the Scheme and “… that the decision of the quantity surveyor shall be binding on both parties."

The adjudicator’s decision was duly received, but the Khuranas decided that the decision was not to their liking and commenced court proceedings to determine the dispute as allowed under the Scheme.

Webster objected, arguing amongst other things that the parties had agreed that the adjudicator’s decision was to be "binding", meaning "finally binding", and as such the Court could not consider the matter.

The court's decision

HHJ Stephen Davies QC in the Manchester District Registry of the TCC considered the binding nature of the agreement. Binding had to be considered in the context with which it was used and not just assigned its ordinary meaning.

He decided that both parties had to be taken as being aware that the use of the Scheme carried with it a proposal that, unless expressly stated, the decision would be temporarily binding.

However, he decided that the use of the words “save that the decision … shall be binding on the parties” could only sensibly have been intended to derogate from the default position.

The average man in the street would, therefore, have been in no doubt that the only sensible reason to include these words was to make the adjudicator’s decision permanent as opposed to temporarily binding.

The decision was also considered in light of the Unfair Terms in Consumer Contracts Regulations 1999, but it was decided that the question of unfairness under Regulation 5 did not arise as the term had been individually negotiated and had not been drafted in advance.

The Khuranas had clearly been able to influence the substance of the Agreement and had indeed seized that opportunity by writing a letter setting out the basis on which they were willing to accept the offer.

In any event, the Court was satisfied that the term was not unfair, there being no imbalance or detriment to either party.

The Judge confirmed that clear words would be needed to impinge on a party’s rights to access the Courts, but that there was nothing in principal to stop parties agreeing to use arbitration, adjudication or expert determination to finally resolve a dispute.

Effectively, if the parties had not used “binding” in their correspondence in this case, the adjudicator’s decision would not have been finally binding.

However, they could not now look to change what they had initially agreed.

Implications of this case

The warnings to be taken from the case are clear.

Firstly, be clear and be careful about what it is that you are proposing. Care should be taken when entering into adjudication agreements, particularly ad hoc ones, to ensure that the intentions of the parties are properly documented.

In this case it is not clear whether the parties actually intended the adjudicator’s decision to be “finally binding” but it was certainly clear that, after a negative decision, the Claimants did not want it to be so.

Secondly, care must be taken when agreeing to an adjudicator’s decision being binding. The adjudication process is both rough and ready, but even so most decisions will be upheld by the Court, even if they are wrong on the law, the facts or both.

Lastly, the parties should be aware that some standard form contracts, including the widely used NEC3 suite of contracts, provide for an adjudicator’s decision being finally binding after a stated period of time.

To prevent this requirement, a formal notice of intention to change the decision needs to be issued within a set period. Parties need to be aware that this risk does not therefore only apply to ad hoc procedures.

Need advice? Get in touch today

Please call William Buckenham on 01482 324252.

Or email William here.

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