I recently acted as an adjudicator in a dispute between two parties to a construction contract. The dispute raised an important issue for the UK construction industry. I have changed the facts to protect identities.
For those not familiar with adjudication, the UK government introduced a procedure for resolving construction disputes under the Housing Grants, Construction and Regeneration Act 1996 (the “1996 Act”). Section 108(1) provides that a party to a construction contract may refer a dispute for adjudication under a qualifying procedure, one which allows a party to notify and refer a dispute for adjudication at any time. Following the appointment of an adjudicator within seven days of notifying a dispute, the adjudicator must issue his or her decision within 28 days of the referral (or longer if agreed). The decision is binding on the parties until finally determined in later legal proceedings, arbitration or by agreement. Later challenges are relatively rare.
Parliament changed the 1996 Act through Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (the “1996 Act as amended”).
Background to the adjudication
In July 2016, an employer appointed a contractor under a written construction contract to carry out some work for a lump sum of £500,000 over 12 months. Like many contracts, it contained a ‘no oral variation’ clause.
The project suffered delay, and by July 2017 the employer had paid the contractor £500,000 even though it had completed no more than about 25% of the work. The parties then agreed a ‘cost-plus’ arrangement to carry out the remaining work. This is different from the original arrangement because ‘cost-plus’ involves paying cost incurred plus an addition for overheads and profit whereas a ‘lump sum’ involves paying a pre-agreed price for completion of specified work.
The employer thereafter paid the contractor an extra £1,000,000 under the cost-plus arrangement over the next 11 months. In June 2018, however, the employer asked the contractor to repay the £1,000,000 and issued a negative payment notice. The employer said the absence of writing rendered the cost-plus arrangement invalid. It relied on the Supreme Court’s decision issued in May 2018 called Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24.
The obiter decision of the Court of Appeal in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] 1 CLC 712 held sway when the parties made their contract, and when they made the later cost-plus arrangement. In Globe, Beatson LJ said he preferred the approach taken in the World Online Telecom v I-Way Ltd [2002] EWCA Civ 413 case. This case sanctioned variations to a contract made orally or by conduct even if the contract expressly prevented variations from arising in this way. Underhill and More-Bick LLJ supported Beatson LJ, which effectively meant that ‘no oral variation’ clauses had no teeth or were routinely disapplied.
Rock Advertising
On 16 May 2018 (one month before the employer asked the contractor to repay £1,000,000), Rock Advertising changed the decision in Globe Motors.
Lord Sumption said modern litigation rarely raised truly fundamental issues in the law of contract, but this case raised two – one being whether a change to a contract made at variance to its terms was legally effective.
The Rock case concerned a license to occupy serviced offices in London, for a fixed term of 12 months, at a fee of £3,500 a month (first three months) and £4,333 from then on. Rock fell into arrears of £12,000 by February 2012 (after five months), so it proposed a new payment plan to its licensor (MWB). Although Rock claimed that MWB had orally agreed to the new plan, MWB denied this and locked Rock out of the offices on 30 March 2012. MWB terminated the license on 4 May 2012.
Lord Sumption decided that the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation. The other four judges in the Supreme Court agreed with Lord Sumption.
Lord Sumption went on to say (para. 16):
“The enforcement of No Oral Modification clauses carries with it the risk that a party may act on the contract as varied, for example by performing it, and then find itself unable to enforce it…In England, the safeguard against injustice lies in the various doctrines of estoppel. This is not the place to explore the circumstances in which a person can be estopped from relying on a contractual provision laying down conditions for the formal validity of a variation. The courts below rightly held that the minimal steps taken by Rock Advertising were not enough to support any estoppel defences. I would merely point out that the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself: see Actionstrength Ltd v International Glass Engineering In Gl En SpA [2003] 2 AC 541, paras 9 (Lord Bingham), 51 (Lord Walker).”
Which estoppel?
The contractor accepted that the cost-plus arrangement was not in writing and therefore not legally effective, so it pleaded estoppel. The employer did not engage because it said estoppel was not suitable for adjudication.
There are many forms of estoppel and no universal agreement on the elements necessary to make out its many forms except perhaps on the need to show detriment and reliance. Proprietary estoppel can be used offensively and, although disputed, the other forms are intended to operate defensively. Most are evidential, yet substantive rights can be created; some require a pre-existing relationship and some do not, some require a representation and some a promise, and some are suspensory while others extinguish rights permanently. One can also add into the mix the words of Ormrod LJ in Brikom Investments v Seaford [1981] 1 WLR 863 CA who said that, with a little ingenuity, a sword can be beaten into a shield and shield into a sword.
The contractor argued both estoppel by representation and promissory estoppel citing the following elements:
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Estoppel by representation requires a representation of a fact which is not true. A representation as to future intent does not give rise to this. Promissory estoppel, however, is an exception in equity. It not only allows but requires a promise of future intent. This means a promise to forgo exercising an existing legal right under a contract falls within the doctrine of promissory estoppel, which suggests that promissory estoppel applies on the facts here. Some argue that representations of fact can stand as representations of intent and vice versa. This suggests that estoppel by representation could or might also apply. Whichever applies, perhaps both, we are in a specialist area.
Does the decision in Rock Advertising apply to construction contracts?
This is unclear because the right to adjudicate under the 1996 Act at one time depended upon the existence of a contract and other agreements which are (or are evidenced) in writing – see RJT Consulting Engineers Limited v DM Engineering (Northern Ireland) Limited [2002] EWCA Civ 280.
Parliament later changed the 1996 Act through the 2009 Act and repealed the need for construction contracts and other agreements to be in writing as a precondition to adjudicating on substantive rights created otherwise than in writing.
Parliament instead expressly gave the parties to a construction contract the right to adjudicate on a substantive right even if the right was created orally, partly oral, or written and later amended orally.
The rationale for the change seems to be the injustice said to have stemmed from parties to construction contracts often transacting business informally and flexibly and making oral agreements and oral changes to written agreements. This is not the place to discuss whether Parliament should be encouraging parties to transact in this way.
It is arguable, however, that the decision in Rock Advertising might not apply to construction contracts falling within the purview of the 1996 Act (as amended) either because:
- The provisions of the 1996 Act (as amended) were not in the mind of the Supreme Court when they arrived at the decision in Rock Advertising; or
- The decision in Rock Advertising was not seen as encroaching upon the operation of the 1996 Act (as amended).
It would be a stretch, in my view, to suggest that the Supreme Court regarded it as clear that ‘no oral variation’ clauses applied to construction contracts irrespective of the terms of the 1996 Act (as amended).
Court decisions should not be construed so as to repeal or emasculate Parliament’s intent. If the decision in Rock Advertising unreservedly applies to construction contracts, it is arguable that it could thwart the purpose behind the changes brought in by the 1996 Act (as amended), at least in circumstances where it prohibits substantive relief on rights created orally under contracts containing no oral variation clauses.
The decision in Rock Advertising raises another point because many standard forms of contract used in the construction industry call for variations or changes under the contracts to be in writing. This begs the question whether Rock Advertising applies to those terms too. Time will tell.