Wed, 10 Feb 2010
Under pressure from the construction industry the Government opted, in 1996, to enact legislation - the Housing Grants, Construction and Regeneration Act - creating an industry specific interim dispute resolution procedure called 'adjudication' to enable the fast and (at least potentially) inexpensive temporary resolution of building disputes.
The mischief at which the legislation was aimed was that developers were not paying contractors, who were not paying sub-contractors, and so on down the commercial food chain. Litigation and arbitration were seen as slow and expensive - leaving cash starved builders at the mercy of their alleged debtors and unable to pay their creditors. Something was needed to speed up the flow of cash that is the lifeblood of the construction industry. That something was adjudication. This new procedure was mandatory for all qualifying contracts and enabled either party to refer a dispute to an impartial third party (the adjudicator) who was then required to make a decision on the dispute within 28 days of referral, unless this time period was extended in accordance with the statutory procedure.
Once made the decision of an adjudicator was binding upon the parties until the dispute was finally determined by a court, or an arbitrator (where appropriate), or by agreement. This temporary finality was reinforced by the courts which decided that the decision of an adjudicator must be enforced unless the adjudicator lacked jurisdiction or breached the rules of natural justice (see Carillion Construction Ltd v. Devonport Royal Dockyard Ltd (2005)). This means that a decision that is plainly and obviously wrong will nevertheless be enforced unless one of these narrow and now tightly confined exceptions applies. It can be seen immediately that this 'pay now, sue later' approach could lead to injustice where an adjudicator gets it spectacularly wrong (as has occurred from time to time), especially if paying the amount decided upon pending final resolution will prove ruinous, or if the beneficiary of the erroneous decision goes bust before the wrongly awarded money can be recovered through court or arbitral proceedings.
Foreseeing, one presumes, the risk that this temporary finality posed, Parliament was careful to build in some safeguards. One was that statutory adjudication would only apply to construction contracts (as defined) which were in writing (a safeguard that will be removed when the Local Democracy, Economic Development and Construction Act 2009 comes into force). The other safeguard, which was aimed at the layman as opposed to commercial entities, was that construction contracts with residential occupiers were exempted from the operation of the Act.
A construction contract with a residential occupier means a construction contract which principally relates to operations on a dwelling which one of the parties to the contract occupies, or intends to occupy, as his residence. So the layman wishing to build, refurbish or extend premises that are or will be his residence need not be concerned with statutory adjudication and is not put at risk of being drawn into the process or of being exposed to the injustice that an erroneous decision may entail. However, there are limits on the scope of the residential occupier exemption.
One example of these limits is where the contract involves a commercial element that is likely to take it outside the exemption. This is what occurred in Samuel Thomas v Anon (2000) where the contract involved operations on a number of buildings, one of which the employer intended to occupy but the others of which were intended for onward sale. This commercial element led to the conclusion that the contract could not be said principally to relate to operations on a dwelling which one of the parties intended to occupy. The result was that the adjudicator did have jurisdiction and his decision was enforceable. Another example of the limits to the residential occupier exemption is where the intention to occupy does not exist at the time the contract is formed. This is what occurred in Shaw v Massey Foundations Ltd (2009) where the owners of a grand country house contracted to have building works carried out on their East Lodge which was remote from the house by about a quarter of a mile. At the time the contract was entered into there was no commercial aspect to the work, but neither did the owners occupy, or intend to occupy, the lodge. Subsequent to formation of the contract one of the owners decided to occupy the East Lodge as a residence. This was not, however, sufficient to bring the owners within the residential occupier exemption. The adjudicator therefore had jurisdiction and the decision was enforced.
In both the Thomas and Shaw cases the contract did not expressly provide for adjudication so the statutory adjudication procedure was imported as the contracts were in writing but the residential occupier exemption did not apply. However, there have been instances where persons who could take advantage of the residential occupier exemption have entered into an agreement containing an express adjudication procedure and who have then sought to avoid the consequences of adjudication subsequently. These attempts at avoidance have been made on the basis that the employer is a consumer for the purposes of the Unfair Terms in Consumer Contracts Regulations 1999 and that the express adjudication provision is therefore unfair. However, an employer who is also a consumer for the purposes of the regulations cannot easily avoid adjudication by challenging the fairness of the inclusion of an adjudication provision in a contract that is not otherwise subject to the provisions of the Act (see Domsalla v. Dyason (2007)).
In order to effect a challenge under the regulations the term must be one that has not been individually negotiated and which causes a significant imbalance in the parties rights and obligations to the detriment of the consumer contrary to the requirement of good faith (see Picardie v. Cuniberti (2003) and Lovell Projects Ltd v. Legg and Carver (2003)). This involves not only a consideration of the commercial effects of the term but also whether it was imposed in circumstances that justify the conclusion that the supplier has fallen short of the requirement for fair dealing. Where the consumer, through his agent, imposes the term in question it is repugnant to common sense to suggest that the requirement of fair dealing has not been observed (see Bryen and Langley v Boston (2005)).
Adjudication is not always a bad thing, and neither does it always produce an erroneous result. Indeed, it was not suggested in any of the residential occupier cases that the adjudicator had got it wrong. Nevertheless, these cases starkly illustrate the residential occupiers dilemma: include a commercial element, or lack an intention to occupy and the mandatory provisions of the Act apply; agree to the inclusion of an express adjudication provision and limit the scope for adjudication avoidance. But in some circumstances a residential occupier might wish that the contract was subject to adjudication so that he could take advantage of its cheap and fast process. The point is this: advisers ought to make their clients aware of the existence of the residential occupier exemption, its consequences and their options before the building contract is entered into. Clients will then have to balance their risks and decide what they want to do. If they enter into a contract without this risk assessment their options are likely to be severely limited once a dispute arises.