Avoid the argy-bargy and uncertainty of an oral contract and get the thing down in writing

Gurbinder Grewal and Tracey Summerell

There’s no escaping the fact that oral contracts cause uncertainty and can be bad for business. The contractor in RCS Contractors Ltd vs Conway [2017] discovered this the hard way: a disputed oral contract meant delays to the adjudication process, a 16-month wait for payment and an avoidable costs bill.

RCS is not an isolated case: establishing the terms or existence of an oral construction contract can stall the adjudication process. Under the Construction Act 1996, as amended, the right to adjudicate only arises if the parties have a construction contract, whether in writing or oral. If one party questions the contract or its terms, the adjudicator must first decide whether he or she has jurisdiction to proceed with the adjudication. This is often referred to as a “threshold jurisdictional issue”. If the adjudicator does proceed, the unsuccessful party can reserve its right to raise the same jurisdictional argument in response to later enforcement proceedings. Such arguments delay the adjudication process, stall enforcement and clog up cash flow.

The facts in RCS were straightforward. The parties had a payment dispute about RCS’ ground works carried out for Conway at three sites. An adjudication reference was made. Conway argued the adjudicator had no jurisdiction to act as there were three contracts, not one, and therefore three separate payment disputes; Section 108(1)of the Construction Act only allows a single dispute to be referred to adjudication. The adjudicator had to decide this issue before proceeding.

Had there been a written contract or three, the issue raised would have been relatively easy to resolve and, indeed, would probably not have arisen in the first place. As it was, the parties had orally agreed terms for work at the three sites at a meeting in December 2012. After reviewing each party’s evidence about that meeting, the adjudicator agreed with RCS: there was one oral construction contract, a single dispute, and that he had jurisdiction. He proceeded with the adjudication and awarded RCS nearly £60,000 in relation to sums due.

Conway obtained leave to defend RCS’ consequent claim for payment on the ground that the adjudicator had no jurisdiction. Mr Justice Coulson had to review the jurisdiction issue all over again and summed it up as follows:

There’s no escaping the fact that oral contracts cause uncertainty and can be bad for business

“Either, as RSC maintains, there was one contract between the parties to cover all three sites, in which case the final account dispute was a single dispute, and the adjudicator had the necessary jurisdiction; or, as Mr Conway maintains, there were three separate contracts, one in respect of each site, and the dispute was actually three different disputes, being a claim for the sum allegedly due under each separate contract. If that was right, the adjudicator would not have had the necessary jurisdiction.”

Mr Justice Coulson heard the parties’ arguments and evidence on what was agreed in December 2012 and concluded they pointed to a single contract covering three sites. The adjudicator did have jurisdiction to decide.

Evidence is crucial when proving the terms of an oral contract. The problem with oral contracts is the difficulty most parties have with remembering and establishing exactly what was agreed. There is unlimited scope for misunderstanding and disagreement. Any formal resolution of that disagreement, whether in adjudication or court, will depend on the credibility of their evidence. In RCS, the judge preferred the contractor’s evidence. Had the parties confirmed their oral agreement of December 2012 in writing, or drawn up a formal contract, they might have saved themselves 16 months worth of expensive argument.

Mr Justice Coulson made clear his disagreement with the 2011 changes to s107 of the Construction Act that made adjudication applicable to oral construction contracts. He was adamant that s107’s repeal had increased uncertainty and was to blame both specifically for the waste of time and costs in RCS - and, generally, for adjudicators having “to grapple with entirely oral contracts” and the likelihood of later jurisdictional battles at the enforcement stage.

While Mr Justice Coulson is not alone in his views on s107, statutory adjustments to the Construction Act are unlikely in the short term given parliament’s current preoccupation with Brexit. The best protection against the procedural nightmare of a jurisdictional dispute is to ensure the contract is in writing.

Protect your right to a swift resolution of disputes through adjudication. Avoid the jurisdictional argy-bargy. Get your contracts in writing and ensure that when disputes do arise, the adjudicator can go straight to the important issues without having to hear time-consuming and costly arguments to decide if he or she can act.

Gurbinder Grewal is a partner and Tracey Summerell a practice development lawyer in the Construction team at law firm Dentons