What we do know
It is well known that under Section 108(3) of the Housing Grants, Construction and Regeneration Act 1996 (the Act) contracts caught by the Act are to provide that the decision of an Adjudicator is 'binding' until the dispute is finally determined by legal proceedings, arbitration or agreement. The Act therefore provides the losing party with a chance to have the dispute, which has been decided by an Adjudicator, looked at again. This 'fallback' position is important as one only has to look at recent judgments in the TCC to see that Adjudicators do sometimes get it wrong.
It is equally well known that 1) if the relevant provisions of the Act are not complied with, the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the Scheme) will apply and that 2) Section 106 of the Act excludes residential occupiers from the Act's provisions.
The Khuranas (the Claimants) and Webster Construction Ltd (the Defendant) entered into a contract for construction works at a property in Cheshire. A payment dispute arose over the work that had been carried and, perhaps strangely from a timing point of view, the parties agreed in correspondence between their solicitors to resolve the dispute under the Defendant's final account by adjudication in accordance with the Scheme. However, the parties' agreement also included the following wording: "save that the decision ... shall be binding on the parties". What does that mean in practice and does it change the 'fallback' position which the Act would otherwise provide?
The Defendant received a favourable decision on its final account in the adjudication. Dissatisfied with the Adjudicator's decision, the Claimants issued proceedings to have the sums due under the final account finally determined by the Court. Unsurprisingly, the Defendant protested on the basis that the Claimants were not entitled to have the issue looked at again because they had agreed that the Adjudicator's decision would be finally 'binding'.
The first issue before the Court was whether the parties had agreed that the Adjudicator's decision should be finally binding such that the Claimants' case had been finally determined by the Adjudicator and could not be pursued any further.
The Court scrutinised the meaning of the word "binding" and decided that use of the word was not in itself in principle enough to strip a party of its ability to have the dispute finally determined elsewhere. The Court therefore further considered the context of the agreement reached between the parties. A crucial point was that the parties (or their solicitors at least) were clearly familiar with the provisions of the Scheme as they had taken a positive decision to modify those provisions.
The Court decided that the parties had agreed to be bound by the Adjudicator's decision in this way and it was not open to the Claimants to have the final account re-determined. That said, the Court did also note that, without the 'binding' phrase, the agreement to use the Scheme "carried with it an implicit but obvious proposal that... the decision would be only be temporarily binding".
This case concerned residential occupiers to whom the Act and the Scheme do not apply. However, those parties are free to enter into whatever adjudication provisions they please. Here, they chose to incorporate the Scheme but then negotiated changes to it of their own volition.
For non-residential construction contracts (to which the Act and Scheme would apply) the position has not changed; the adjudication provisions of the Act need to appear in those contracts and if they do not then the Scheme will apply. If a similar term making the Adjudicator's decision finally binding had been negotiated in a non-residential construction contract, the adjudication procedure would probably not have been compliant with Section 108(3) and so the adjudication provisions of the (unamended) Scheme would have applied.
Residential occupiers often sign standard form contracts containing an adjudication clause. That may be because they consciously decide they want to have a right to refer disputes to adjudication but may equally be because they have not really understood the implications of that process. Or (as here) they may decide that adjudication is the right way to sort out a dispute when one has already arisen. Whatever the circumstances, parties need to be absolutely clear what they are signing up to. Making what might appear to be minor changes to a dispute resolution process (or any other term) could have far reaching implications. The Court is likely to have little sympathy with a party seeking to circumvent contractual terms which it has apparently freely agreed to.