UK: TCC decision underlines the importance of dispute resolution provisions being clearly incorporated in contractual documentation

The Technology and Construction Court has recently granted an injunction restraining an adjudication from proceeding, on the basis of a finding that the contractual provision relied upon to appoint the adjudicator did not in fact form part of the contract that governed the parties' dealings.  As an adjudicator's jurisdiction is rooted in the parties' agreement, the lack of a valid contractual basis meant that the appointment had been a nullity: Twintec Ltd v Volkerfitzpatrick Ltd [2014] EWHC 10 (TCC).

The decision highlights the importance of parties ensuring that any dispute resolution mechanism they intend to apply to their dealings is clearly incorporated in their contractual documentation – including in interim documentation intended to be superseded by a more formal contract.

Michael Mendelblat and Rory Wilson consider the case. 

The dispute

A subcontractor, Twintec, was engaged by a contractor, VFL, to construct floor slabs for a warehouse.  The parties entered into a Letter of Intent (LOI) which stated :

"It is our intention to award you the Warehouse Slab works for all services as detailed within the documents listed below and attached, for the above project, but we are not yet in a position to enter into this Sub-contract. Subject to the terms of this letter, we authorise and request you to proceed immediately with all works necessary to enable you to achieve the Design Programme and Construction Programme in accordance with the documents below…Upon the issue of our formal Sub-contract Agreement, this letter will cease to have any effect and will be superseded by the terms and conditions of that Agreement."  (emphasis added).

The 'documents below' included a draft contract based on the 'DOM/2', which is a standard form of sub-contract for domestic subcontractors.

The owner of the warehouse sued VFL as it alleged the floor slabs were unfit for purpose. VFL in turn served a notice of adjudication on Twintec claiming the costs of certain load tests on the floor slabs -  either by way of damages for breach of contract or pursuant to an indemnity that VFL contended was a term of the formal sub contract (which had not been entered into).  VFL submitted that the LOI was a binding contract and relied on the words "in accordance with the documents below" to contend that the terms of the DOM/2 subcontract(including the indemnity and adjudication provisions) were incorporated into the LOI.

Twintec agreed that the LOI constituted a binding contract, but disputed that it incorporated all the terms of the DOM/2 subcontract.   Rather, it contended that the LOI was a standalone binding contract.   Accordingly, VFL had appointed an adjudicator via an adjudication provision  that did not exist in the LOI.  The appointment therefore was a nullity and an injunction was justified to prevent the adjudication from advancing.

The court's decision

The Court noted that parties could enter into an interim contract prior to agreeing full terms in a formal contract (citing Diamond Build Ltd v Clapham Park Homes Ltd [2008] EWHC 1439 (TCC), 119 Con. L.R. 32 ).  Furthermore, the formal contract could govern the parties' relationship retrospectively.

However, the Court held that business efficacy did not necessitate the implication of a term in the LOI to the effect that every term of the DOM/2 subcontract was incorporated into the LOI.  Rather, only 'primary obligations', such as the design and construction programmes, were incorporated.  The Court deemed certain clauses such as the indemnity and adjudication clauses to be 'secondary obligations', which were not incorporated.

The validity of the procedure for the appointment of the adjudicator goes to the "heart" of the adjudicator's jurisdiction.  Therefore, appointing the adjudicator by virtue of a non-existent contractual provision would nullify the appointment.

The Court also opined that even if the DOM/2 contract had been incorporated into the LOI, there was no evidence that Twintec had agreed to the provision in DOM/2 regarding the nominating body for the adjudicator.  VFL also submitted that, absent incorporation of DOM/2, the Scheme for Construction Contracts (England and Wales) Regulations 1998 applied, under which the President of RICS would be the nominating authority (i.e. the same nominating authority under the default position in DOM/2).   Consequently, Twintec was seeking to promote form over substance, and this was an artificial position.  This submission was rejected by the Court (applying Pegram Shopfitters v Tally Weijl [2004] 1 WLR 2082) since, as noted above, the validity of the appointment of the adjudicator goes to the heart of his jurisdiction.

In the circumstances, an injunction to restrain the adjudication from progressing was justified as this was an exceptional case which would not frustrate Parliament's intention.

Comment

The decision highlights the importance of ensuring certainty in contracts, by expressly agreeing certain terms, such as adjudication provisions, or expressly incorporating terms of another contract (such as the DOM/2), insofar as there is evidence that those incorporated terms have been agreed by the parties.  Words such as "in accordance with" lack certainty and it is too risky to rely on a Court implying terms into a contract, given the high threshold that has to be satisfied to justify implication.