Splitting Hairs and Adjudicating Disputes arising out of or in connection with a Contract

Parties to a construction contract will invariably have a statutory or contractual right to adjudicate disputes that arise between them. Sometimes, however, a dispute may arise because of an alleged misrepresentation by one party made before the contract was formed, because of a mistake or even because of an alleged fraud. Can you adjudicate these types of dispute? Well, it depends on the operable adjudication provisions, if there are any, in your contract.
A valid construction contract, that is one defined by The Housing Grants, Construction and Regeneration Act 1996 as modified by the Local Democracy, Economic Development and Construction Act 2009 ("the Act") must contain operable provisions which comply with section 108 of the Act. The relevant provisions say:
 
Adjudication
 
108    Right to refer disputes to adjudication
 
(1)      A party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section.
 
           For this purpose "dispute" includes any difference.
 
(2)      The contract shall include provision in writing so as to:
 
(a    enable a party to give notice at any time of his intention to refer a dispute to adjudication;
 
(b)     provide a timetable with the object of securing the appointment of the adjudicator and referral of the dispute to him within 7 days of such notice;
 
(c)     require the adjudicator to reach a decision within 28 days of referral or such longer period as is agreed by the parties after the dispute has been referred;
 
(d)     allow the adjudicator to extend the period of 28 days by up to 14 days, with the consent of the party by whom the dispute was referred
 
(e)     impose a duty on the adjudicator to act impartially; and
 
(f)      enable the adjudicator to take the initiative in ascertaining the facts and the law.
 
(3)     The contract shall provide in writing that the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement.
 
The parties may agree to accept the decision of the adjudicator as finally determining the dispute.
 
(3A)  The contract shall include provision in writing permitting the adjudicator to correct his decision so as to remove a clerical or typographical error arising by accident or omission.
 
(4)     The contract shall also provide in writing that the adjudicator is not liable for anything done or omitted in the discharge or purported discharge of his functions as adjudicator unless the act or omission is in bad faith, and that any employee or agent of the adjudicator is similarly protected from liability.
 
(5)      If the contract does not comply with the requirements of subsections (1) to (4), the adjudication provisions of the Scheme for Construction Contracts apply.
 
(6)      For England and Wales, the Scheme may apply the provisions of the Arbitration Act 1996 with such adaptations and modifications as appear to the Minister making the scheme to be appropriate.
 
I have underlined the words "under the contract" because these words now have significant importance following the judgement handed down in the case of Hillcrest Homes Ltd v Beresford and Curbishley Ltd (2014).
 
Prior to this 2014 judgement many commentators, myself included, believed that the law would interpret the words "arising under a contract" broadly and that disputes arising from misrepresentation, mistake and so on which would undermine the very existence of the contract itself could be adjudicated on.
 
This belief stemmed primarily from an arbitration case which ended up in court concerning Fiona Trust and Holding Corporation and Others v Yuri Privalov and Others under the name of Premium Nafta Products Ltd (20th Defendant) & Others v Fili Shipping Co Ltd (14th Claimant) & Others ("Fiona Trust"), an English House of Lords judgement handed down by Lords Hoffmann, Hope, Scott, Walker and Brown on 17 October 2007 in which the House of Lords unanimously affirmed the judgment of the Court of Appeal in the same case, confirming that....
 
"unless the language of an arbitration clause made it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction, it was to be assumed that the parties, as rational businessmen engaged in an international commercial transaction, were likely to have intended any dispute arising out of the relationship into which they had entered, including disputes over the validity of their agreement itself, to be decided by the arbitrator rather than by a court. Such an approach was now part of the law of international commerce and must be accepted as part of English law too (per Lord Hope)"
 
In Fiona Trust, although the contract was ultimately found to be void by the tribunal, the court found that the arbitrator still had jurisdiction to deal with the allegation because the arbitration agreement itself was separable from the parties' contract and so the arbitral tribunal had jurisdiction to decide disputes arising under or in connection with the contract.
 
In Hillcrest Homes Ltd v Beresford and Curbishley Ltd (2014) the JCT Design and Build contract provided that "...any dispute or difference arising under the Contract..." could be adjudicated under the Scheme.
 
Work had started on site in 2011 with a structural engineer being appointed pre-contract by the employer, Hillcrest.  The employer's requirements required the structural engineer's appointment to be novated to the contractor, Beresford and Curbishley, and a draft novation agreement was attached.  The engineer was initially reluctant to sign this document, but the novation agreement was eventually executed as a deed in October 2012.  Adjudication was commenced by Beresford and Curbishley in November 2012 seeking declarations relating to the alleged failure to novate the engineer's appointment.  A decision was made in December 2012, in which the Adjudicator decided:-
 
•    The employer had made a negligent misstatement regarding the novation which induced the contractor to enter into contract
•    The misstatement was a misrepresentation entitling the contractor to damages
     The novation agreement dated October 2012 was void and the structural engineer's appointment had not been novated.
 
Hillcrest sought a declaration, amongst other things, that the decision was unenforceable because claims for misstatement and misrepresentation were outside the ambit of the contract's adjudication provisions.
 
His Honour Judge Raynor QC held that claims for negligent misstatement and misrepresentation were outside adjudication provisions as they did not arise under the contractbut under the law of negligent misstatement or under the Misrepresentation Act 1967 and the adjudicator did not have jurisdiction to decide such disputes.
 
So where does all this leave us?
 
Well, pulling all this together, we can now say that if you are thinking of trying to adjudicate a dispute based on an allegation of misrepresentation or mistake, unless there is an operable adjudication provision in your contract which confers power on your appointed Adjudicator to decide disputes arising under, out of or in connection with your contract you will need to think again. Similarly, if your adjudication is to be based on the statutory regime you are unlikely to get past first base and you will need to think about arbitrating or litigating your dispute, depending on which option you have selected in your contract to finally determine your dispute. 
 
Sorry, but this is one of the situations where it really is necessary to split a few hairs. 
 
Peter Vinden

Peter is an experienced professional in the construction industry with particular expertise in quantity surveying and the commercial management of contracting organisations. 

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