UK: Settlement Agreements And Construction Contracts: The Right To Adjudicate

Last Updated: 11 July 2016
Article by Tim Mould

The right to adjudicate a dispute under a construction contract at any time is a powerful tool. Understandably, parties are reluctant to pursue a claim if the only viable route to do so is to commit to the time and costs of Court or arbitration proceedings. A decision to commence a construction adjudication (under statutory or contractual adjudication rules), where a binding and enforceable decision can be obtained within 28 days, is a quite different and attractive alternative.

There has however been significant potential to date to resist enforcement of an adjudication decision concerning breach of a settlement of a construction contract dispute. That is illogical given that if the relevant construction contract permits a dispute between the parties to be adjudicated, the commercial expectation will naturally be that any dispute over settlement of that same dispute ought also to be referable to adjudication. The recent decision of J Murphy & Sons Ltd v W Maher and Sons Ltd [2016] EWHC 1148 (TCC) is strongly supportive of the common sense position that all settlement disputes, concerning construction contracts with attached adjudication provisions, may now be adjudicated. It decided that a dispute as to whether a final account settlement was concluded was a dispute arising "under" a sub-sub-contract.

The Court's reasoning rejects an historical approach of determining that good jurisdictional challenges to settlement related decisions arise if the relevant construction contract has a narrowly drawn adjudication provision. Why Murphy v Maher is likely, but not inevitably, going to be the Courts' approach to future adjudication decisions is now explained.

The Background

Murphy engaged Maher under a sub-sub-contract that was based on an NEC3 form of contract which included Option W2 that provided that "any dispute arising under or in connection with this sub-contract is referred to and decided by the Adjudicator". Maher's position was that, following its final payment application, a "final account sum" was agreed during a telephone conversation and this was referred to in subsequent correspondence sent to Murphy (that was not challenged at the time). Over three months after the telephone conversation, Murphy said that it was awaiting final sign off from head office as to the payment situation. Murphy then proceeded to set out its gross valuation of Maher's works which was circa £230,000 less than the alleged agreed final account sum.

Maher made a first referral to adjudication of its claim that Murphy had failed to pay the settlement sum but this was withdrawn. The completed sub-contract data section of the sub-sub-contract had identified the TCC as the "Adjudicator nominating body". Murphy took the point that because the TCC is not in fact a nominating body, there was no contractual basis for Maher to apply to the RICS for the appointment of an adjudicator. Murphy went on to say that because of this defect in the contractual adjudication provision the Housing Grants Construction and Regeneration Act 1996 statutory scheme for adjudication (the "Scheme") must apply in its entirety. That correspondence prompted Maher to make a second referral to adjudication but this time under the Scheme. This turned out to be a crucial point in the proceedings. This was because, at face value, the wider wording of the types of dispute which can be referred to adjudication, and that applies under NEC3 Option W2, is not replicated in the Scheme's provisions. The Scheme instead provides that it is [only] disputes "under" a construction contract that may be referred to adjudication. As is typically the case, no adjudication provisions were expressly agreed as part of the alleged settlement.

The Parties' Main Submissions

The arguments before the Court referenced various case law as to: (a) the effect of differently worded dispute resolution provisions, and (b) instances where challenges to the right to adjudicate construction contract settlements have been successful, on the particular facts. There were competing authorities. Themes of these cases included that:

  1. The Courts have drawn a distinction between dispute resolution provisions which refer only those disputes which may arise regarding the rights and obligations which are created by the contract itself [i.e. disputes "under" a contract], and those which show an intention to refer a wider category of disputes [i.e disputes "in relation to" or "in connection with" a contract].
  2. Construction contract settlement agreements may be analysed either as a variation of the related construction contract or as a standalone agreement. If the Court's analysis is of the former type, then where a narrower dispute resolution provision applies, the dispute falls within the four corners of the dispute resolution provision. If however the settlement agreement is analysed as a standalone agreement it will be important that the dispute resolution provisions are more widely worded.
  3. In relation to arbitration clauses, the starting point should be the assumption that "the parties as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction". This dicta is taken from the House of Lords decision known as The Fiona Trust.

The Court's Decision

The Court's decision was heavily influenced by its view as to the overall merits and the undesirable consequences of holding that settlement agreements, in relation to construction contracts which contain adjudication provisions, may not themselves be subject to the right to adjudicate.

The Court's view was that the reference in Murphy order's to the TCC as a nominating body did not trigger the Scheme's adjudication provisions operating – instead the selected NEC3 Option W2 survived. It stated in bald terms its view that "Murphy's position in this case is very unmeritorious." What irked the Court was that as a result of Murphy persuading Maher – incorrectly in the Court's view – that it needed to refer its dispute to adjudication under the Scheme, Murphy was in consequence presented with a platform to jurisdictionally challenge Maher's ability to adjudicate at all. This in circumstances when such a jurisdictional challenge would not have been available to it by reference to Option W2. Murphy's Counsel conceded before the Court that a claim based on the alleged settlement would qualify as a dispute "arising under or in connection with" the sub-sub-contract.

From a common sense perspective the Court considered that there was a great deal to recommend it following, in relation to adjudications, the same approach as the House of Lords adopted for arbitration clauses in The Fiona Trust. The Court's reasoning as to why it was of that opinion concluded with the following trenchant words:

"It would be extraordinary and illogical if the parties here or Parliament had intended that an otherwise properly appointed adjudicator would have jurisdiction if addressing what entitlement a contractor or sub-contractor might have to be paid in all circumstances save in relation to where a dispute arises as to whether that entitlement had been settled. If Murphy was right, save by ad hoc agreement, one could never adjudicate in a construction contract on an interim or final account which had been agreed in some binding way; that makes commercial and policy nonsense in circumstances in which such agreements must occur all the time and must be encouraged and supported ..."

The Court's Likely Future Approach and Lessons for the Future

In light of the Court's decision, it will be a brave party who now seeks to resist the enforcement of an adjudication decision concerning a settlement agreement on jurisdictional grounds. However, that is still possible because a future Judge at first instance will not be bound to follow the decision just made. The Court indicated that it would be sympathetic to an application for permission to appeal because it would be helpful for there to be a Court of Appeal decision on the issues raised. Given the facts of Murphy v Maher, however, an appeal may not occur. The Court noted, as an aside, that if it had to decide the issue, it would have said that the alleged settlement agreement was a variation of the earlier construction contract. Also, as noted, it was held that the NEC3 Option W2 did in fact apply.

Whilst deference must of course be shown to any House of Lords decision, The Fiona Trust is not of applicable outside of the sphere of dispute resolution provisions. There are many instances where the Courts have had to make findings (not involving arbitration clauses) concerning the interpretation of a contract's term's scope and where the inclusion of the formula "in relation to" or "in connection with" has been under the spotlight. Here the inclusion of such words has been of significance and the justification for an ultimate finding as to the term having a broader ambit. That, it is submitted, will remain the case generally. However, there is every prospect that an appellate Court would see all dispute resolution provisions as being in a special category and so endorse the Court's approach for adjudication clauses in Murphy v Maher. More particularly, on The Fiona Trust basis that widely construing an arbitration clause (and the same logic is equally applicable to an adjudication clause), irrespective of its language, satisfies the "it goes without saying" officious bystander test as to what the contracting parties must surely have intended.

Until there is a Court of Appeal decision on this issue, it would be prudent to ensure that express adjudication provisions within construction contracts are worded in the widest terms. This will avoid the possibility that, after reaching a settlement to "buy out" the time and costs risks of protracted proceedings, those advantages prove to be illusory because there is no swift route to enforce the settlement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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