Adjudicating contract agreements in consumer law

When will an adjudicator’s decision be binding? Andy Mather, partner in the construction and engineering group at Macfarlanes, comments on a recent ruling saying clear drafting should be used.

Original news

Khurana and another v Webster Construction Ltd [2015] EWHC 758 (TCC), [2015] All ER (D) 262 (Mar)

The parties contracted for the defendant construction company to carry out work on the claimants’ home. A dispute arose and it was agreed that it would be determined by adjudication.  The adjudicator made a decision in which, among other things, the claimants were to commence proceedings for the matters still in dispute.  The defendant applied to have the proceedings struck out. The Technology and Construction Court held that, on the evidence, it was not open to the claimants to have certain matters re-decided, and that the claim would be set aside and the proceedings stayed.

What were the facts of this case?

Webster Construction Limited (Webster) was engaged by the Khuranas in April 2010 to carry out works to the Khuranas’ home in Cheshire.  The works proceeded and by the end of 2011 there was a dispute about the final account and the amount due to Webster.  As the contract was with residential occupiers for works to a dwelling house there was no statutory right to adjudication.  However, in October 2013, and at Webster’s suggestion, the parties agreed to determine the dispute by adjudication in accordance with the Scheme for Construction Contracts (England and Wales) Regulations 1998 as amended (Scheme), subject to the decision of the adjudicator being “binding on the parties”.

In September 2014, the appointed adjudicator decided a substantial sum was due to Webster.  This led to an argument about the meaning and effect of the word “binding”.  Could the dispute before the adjudicator be re-litigated in court in the same way as a normal statutory adjudication?  In reaching its judgment, the court considered the meaning of the adjudication agreement and the impact of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs).  This update concentrates on the UTCCRs aspects of the judgment.

What issues were raised in relation to UTCCR?

It was common ground between the parties that the UTCCRs applied as the Khuranas fell within the definition of “consumer” and Webster fell within the definition of “sellers or suppliers”.  The issue raised on behalf of the Khuranas was whether the term that the adjudicator’s decision be binding was:

  • unfair for the purposes of UTCCR, reg 5;
  • not expressed in plain, intelligible language for the purposes of UTCCR, reg 7.

If either argument succeeded the term would not bind the Khuranas and they would be able to re-litigate the issues covered by the adjudicator’s decision.

UTCCR, reg 5 provides that a term which has not been “individually negotiated” will be regarded as unfair if it causes a significant imbalance in the parties’ rights to the detriment of the consumer (in this case the Khuranas).  For the purposes of UTCCR, a term which has been “drafted in advance” and which the consumer has not been able to influence is not individually negotiated and so will always be subject to the fairness test.

UTCCR, reg 7 provides that a seller has to ensure that written contractual terms are expressed in “plain, intelligible language” and that, in the event of doubt about the meaning of the term, the interpretation most favourable to the consumer will apply.
What was the outcome of the case?

As an initial point, the judge decided the proper interpretation of the agreement reached between the parties was that the adjudicator’s decision was to be permanently, rather than temporarily, binding.  He then went on to consider the UTCCRs issues. 

In his judgment, UTCCR reg 5 did not apply as the term had been “individually negotiated”.  Although Webster had put forward a written proposal in a letter from its solicitors which might be said to be “drafted in advance”, the judge did not consider it would qualify as such if there was no evidence that the term had been drafted prior to production of the letter in question.  Even if it was “drafted in advance”, the Khuranas had clearly had the opportunity to influence the term, and took that opportunity by instructing solicitors to set out the basis on which they were prepared to accept the proposal.

In any case, the term was not “unfair”:

  • there was no economic or legal imbalance between the parties – the Khuranas were professionals with a substantial property whilst Webster was a “modest one man building company” - both parties had access to legal representation and were able to assert their interests;
  • the Khuranas knew that they could not be forced to use adjudication and there was no evidence that they felt pressured into agreeing to Webster’s suggestion;
  • while adjudication has its disadvantages, it was proposed for the benefit of both parties – it could save time and money, and the Khuranas were not being forced into a procedure which was manifestly to their disadvantage; 
  • in the circumstances, there was nothing intrinsically objectionable about the procedure proposed - this was not a case of a large business restricting a small consumer’s right to have disputes determined by a convenient local court by way of insisting on pre-prepared standard conditions – instead, the parties had freely and equally negotiated a bespoke dispute resolution procedure which suited both of them at the time.

The judge also decided that the clause was clear and intelligible for the purposes of UTCCR, reg 7 – “I do not think that any reasonable reader, even without the benefit of a legal background …. could reasonably have thought that ‘binding’ meant anything other than finally binding so as to exclude the possibility of re-opening the same argument in subsequent court proceedings”.

To what extent is the judgment helpful in clarifying the law in this area?

The decision sheds some light on the meaning of when a term is “drafted in advance”.  The Khuranas argued that the adjudication proposal in this case was “drafted in advance” by the supplier because the term had been included in a letter prepared by Webster’s solicitor.  If this argument had succeeded, it would have meant that a term would always qualify as being “drafted in advance” if it is put forward in writing by the supplier before agreement – even if it had been developed specifically for the situation and was not part of any standard terms. 

Instead, the judge adopted a purposive approach and decided that, where a party puts a proposal for consideration and possible acceptance by the other side in a document (in this case, a letter) where “… there is no evidence or basis for considering that it had been drafted prior to the production of the [document] …”, the “drafted in advance” requirement is not satisfied.

This decision also confirms the general view of the courts that, whilst adjudication has its disadvantages, it also has many benefits for parties and there is nothing intrinsically unfair to a party (including a consumer) in agreeing to adjudication (whether the adjudication is to be temporarily or finally binding).

What are the implications for practitioners?

Adjudication under the Scheme is only temporarily binding.  If parties wish to change this position then clear drafting should be used.  Practitioners should consider using terms such as “finally binding” or “final and binding” in order to avoid any doubt.

Although UTCCR will eventually be repealed and replaced by the unfair contract terms provisions of the Consumer Rights Act 2015 (anticipated on 1 October 2015) claims may still be brought under UTCCR for a number of years and the guidance on the meaning of “drafted in advance” will be of use during this period.

Are there still any unresolved issues lawyers will need to watch out for?

The crucial issue for a seller or supplier is whether a term has been “individually negotiated” and practical guidance on this is still lacking.  Uncertainty is likely to remain wherever a supplier or contractor presents written terms for acceptance by a “consumer”.  It should be remembered that just because a consumer has been given the opportunity to consider a term does not mean that it has been “individually negotiated” (UK Housing Alliance Ltd v Francis [2010] EWCA Civ 117, [2010] 3 All ER 519).

Interviewed by Nicola Laver.

This article was first published on Lexis®PSL Construction on 22 April 2015.