Case law analysis: Variations to terms and adjudication

This article discusses the 2002 TCC case of Carillion Construction -v- Devonport Royal Dockyard (November 2002) that has not previously been considered in this column. This case included a consideration of whether an oral variation to a contract meant that the contract was not entirely in writing, thus depriving an adjudicator of jurisdiction.

An essential pre-condition to the right of either party to a construction contract to refer a dispute to statutory adjudication is that there must be a construction contract as defined by the HGCR Act 1996. Further, S107(1) of the act states that the provisions of the Act apply only where the construction contract is in writing.

In accordance with S107(2), there is an agreement in writing, (a) if the agreement is made in writing (whether or not it is signed by the parties), (b) if the agreement is made by exchange of communications in writing, or (c) if the agreement is evidenced in writing. S107 (3) states that where parties agree otherwise than in writing by reference to terms that are in writing, they make an agreement in writing.

These provisions were considered in the familiar case of RJT Consulting Engineers -v- DM Engineering (NI), in which by a majority of two-to-one, the Court of Appeal decided in March 2002 that all of the terms of the contract had to be evidenced in writing. It was not sufficient for there to be documents, such as invoices, that were consistent with the existence of a contract, there had to be written evidence of the terms themselves.

An issue that arises from this decision is what happens if the parties reach an oral agreement to vary the terms of a contract previously evidenced in writing, but do not record the oral agreement in writing. In most cases this will not be a concern as most construction contracts include a contractual adjudication procedure that would entitle the parties to adjudicate. However, in cases where there is no contractual adjudication procedure, the parties will be concerned to establish whether the Act applies in order to provide the right to adjudicate.

In Carillion Construction Ltd -v- Devonport Royal Dockyard His Honour Judge Bowsher QC had to consider the effect of an alleged oral agreement to convert a target cost contract that was subject to a pain/gain sharing provision to a fully cost-reimbursable contract, without any pain/gain sharing.

Carillion was engaged as subcontractor to upgrade No.9 dock and provide new buildings with associated infrastructure at Devonport Royal Dockyard, and a dispute arose over the agreed basis of payment. The original contract between the parties contained no adjudication provision, so Carillion commenced adjudication under the scheme. In the adjudication, Carillion claimed that at a meeting on 30 October 2001 an agreement had been reached that the contract would become fully cost reimbursable, without any pain/gain sharing. The adjudicator found this to be the case and awarded Carillion a payment on this basis.

Devonport refused to pay, alleging among other things, that if there was such an agreement, which was denied, this would amount to a variation to the contract terms that had not been evidenced in writing such that the adjudicator had no jurisdiction. Carillion sought to enforce the decision and the judge reviewed the meaning of the provisions of S107 of the act and the decision of the Court of Appeal in the RJT case.

In summary, he found that the alleged agreement to vary the commercial basis of the contract was a "material term" of the contract, which all three judges in the Court of Appeal decision in RJT agreed had to be evidenced in writing. He found that an exchange of letters that made reference to the meeting, but which disagreed about the alleged agreement, did not amount to a record of an unequivocal agreement as to a revised basis of remuneration and that therefore the term was not evidenced in writing and the adjudicator had no jurisdiction.

The judge decided that S107(3) of the act, cited above, uses the words "by reference to terms that are in writing", not "by reference to a previous agreement that is in writing" and does not therefore provide for adjudication in relation to an alleged fundamental variation of a construction contract made orally and without writing.

Although Judge Bowsher reached his decision on the basis that the term of the contract being varied was a "material term", he did not specifically exclude the possibility, following the Court of Appeal decision in RJT, that an oral agreement to vary any term of the contract must also be recorded in writing to comply with the act.

The argument that some term of the contract is not in writing therefore provides fertile ground for objecting to the jurisdiction of an adjudicator. Recent articles in this column have considered the DTI consultation process concerning proposals to amend the act to overcome this ground for a jurisdictional challenge. The DTI proposes that the scope of the act will be extended to apply to construction contracts that are agreed wholly in writing, only partly in writing, entirely orally or varied by oral agreement.

Although there are clear benefits associated with the removal of this ground for a jurisdictional challenge, the new proposal is not without difficulty. As Judge Bowsher said in Grovedeck -v- Capital Demolition (2000): "Disputes as to the terms of oral construction agreements are not readily susceptible of resolution by a summary procedure such as adjudication"

If the proposal is adopted, there will be some cases where the extent of the oral terms could make it difficult for an adjudicator to decide whether or not a contract exists, and he will not be able to determine this without first receiving evidence as to the existence of, and the alleged terms of, the oral agreement.