When a contractor contracts with a client using a standard form, like the JCT, the last thing he expects is for the client to be able to challenge the enforceability of that contract in the courts. After all, the terms of the JCT are well-known and well-used in the construction industry and we all need to know that we can rely on any contract terms agreed with the client.
However, that is exactly the situation that faced the claimant contractor in the case of Steve Domsalla (trading as Domsalla Building Services) v Kenneth Dyason. When Domsalla sought to rely on the JCT clause barring Mr Dyason’s right to set off his claim for damages, the High Court ruled that the clause was unenforceable.
In order to understand how the Court reached this decision, it is important to understand the background to the claim. Mr Dyason’s house was badly damaged by a fire. His insurers agreed to reinstate the property. They appointed loss adjusters, who recommended Domsalla to undertake the works. At his insurers’ request, Mr Dyason entered into a JCT Minor Works Building contract with Domsalla, which included the usual withholding notice clause. After many months, the works were still not complete and Domsalla suspended work due to on-going disputes with Mr Dyason about the scope and quality of the works and the non-payment of certified sums.
Domsalla decided to refer those disputes to adjudication. Mr Dyason argued that the adjudication and withholding notice clauses in the JCT were unenforceable due to the operation of the Unfair Terms in Consumer Contract Regulations 1999. He also challenged the validity of the clause preventing him from setting off his claim for damages against Domsalla’s claim for unpaid costs. The adjudicator rejected these arguments and made an award in Domsalla’s favour. However, when Domsalla brought a claim to enforce that award, the Court refused to do so.
In its judgment, the clause entitling Domsalla to refer its dispute with Mr Dyason to adjudication was perfectly reasonable and enforceable. However, the Court then looked at the clause concerning withholding notices and concluded that, since Mr Dyason was not entitled to issue these notices, yet was personally liable under the contract, the effect of the withholding provisions could and did substantially affect his rights, so that the withholding notice clause was unfair.
Whilst Mr Dyason was the client so far as Domsalla was concerned, and had a legal liability to make any payments due under the contract, in reality it was his insurers and their appointed loss adjusters who controlled the administration of the contract, including any payment discussions. Mr Dyason was not entitled to issue withholding notices, as his insurers had full control over whether, when and in what terms any notices should be issued. It followed that, if Mr Dyason was to be personally liable for any payments due under the contract, the effect of the withholding provisions could substantially affect his rights and was unfair. The Court therefore concluded that the withholding notice clause did fall foul of the Unfair Terms in Consumer Contract Regulations.
Having reached that conclusion, the Court then came to consider the arguments about whether Mr Dyason could offset his claim for damages against Domsalla’s claim for sums due under the contract. In the Court’s view, the adjudicator had been wrong to disregard Mr Dyason’s defence of set-off. The adjudicator’s failure to consider the merits of Mr Dyason’s claim to offset damages against Domsalla’s claim was not only procedurally unfair but also resulted in him failing to decide all matters that had been referred to him for decision. The adjudicator had therefore acted incorrectly and the court gave Mr Dyason permission to defend Domsalla’s claim.
This is an important decision because it shows that, just because a clause may appear in a commonly-used standard form contract, that does not mean it will necessarily be enforceable against a client. Whilst this case turned on its facts, and the outcome would have been very different had Mr Dyason’s insurers not been involved, it nevertheless shows that we cannot be certain that a clause will be enforceable, just because it is a standard clause in general use in the construction industry.
This decision is significant for both contractors and insurers. A builder in the same position is Domsalla may now consider bringing a claim for unpaid costs against insurers direct, rather than against the client who has no control over the administration of the contract. Indeed, the judge noted that Domsalla could have sued insurers direct, with the benefit of the clause preventing a set-off. The fact that there was a dispute between Mr Dyason and his insurers concerning the scope of cover, which was why insurers had stopped making payments to Domsalla, would not have served as a defence to that claim.