Adjudication: An important Supreme Court decision

The Supreme Court last week delivered a much-awaited decision regarding the UK statutory regime that provides a right to refer construction contract disputes to an adjudication process before any formal proceedings can be commenced.  Although the ruling relates to the construction sector, one of its practical implications is something that applies to commercial transactions more generally: the importance of considering whether any pre-action ADR obligation should be coordinated across related contracts, with the aim of providing a process that is capable of resolving all aspects of a dispute. 

The Supreme Court's decision (Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP  [2024] UKSC 23) is analysed on our Construction Notes blog here.  In short, it held that the statutory adjudication regime will not apply to most collateral warranties, under which a construction contractor warrants to a third party (such as the client's financier) that it will perform its obligations under the main construction contract.  That ruling means that, where there is a dispute regarding performance, there will usually be no statutory right to insist that a collateral warranty be dealt with within any adjudication of the main contract dispute.

One of the reasons for the Court of Appeal's earlier decision that the regime did apply to collateral warranties was that the same factual disputes about the same construction operations should be able to be dealt with by the same adjudicator even where there were different contracts, thereby ensuring consistency of approach and cost efficiency.   The Supreme Court acknowledged that one of the purposes of the regime is to provide an effective dispute resolution system for construction disputes, and that it promotes the use of adjudication to that end.  However, that did not assist it in identifying where the boundaries of the regime lay, which was a matter of statutory interpretation.  It held that there were good reasons in principle and in practice for interpreting the statutory regime as not extending to collateral warranties (unless, unusually, a warranty included distinct construction obligations beyond those in the main contract).

However, as the Supreme Court noted, that conclusion does not prevent the parties to a collateral warranty choosing to contract into the adjudication regime.  Whether that would be considered desirable in any particular case, and whether it could be negotiated, may depend on the features of the project and the entities involved. 

The same can be said of any commercial transaction involving multiple related agreements. 

The potential consequences of a pre-action ADR obligation not extending to related agreements were well illustrated recently in Lancashire Schools SPC Phase 2 Ltd v Lendlease Construction (Europe) [2024] EWHC 37 (discussed in this post).  In that case,the High Court there accepted that a clause in a head project agreement created a binding obligation to refer any disputes under that agreement to adjudication, as a pre-condition to the commencement of court proceedings. Nevertheless, exercising its discretion, the court refused to order a stay of litigation that had been commenced by one of the parties in breach of the clause. That was because the disputed issues affected other parties under related downstream contracts, who were joined to the litigation but were not contractually bound to adjudicate and did not agree to do so. In the couirt's view, an adjudication involving only two of the parties would be of little utility, and could jeopardise the potential for the wider dispute to be resolved by a multi-party mediation in the future. 

Test button