When projects don’t go to plan, parties sometimes get together to find a commercial way forward that suits both of them. It is important that when agreeing arrangements that depart from the strict application of the contract, those arrangements are carefully thought out and documented. That is one of the two points to be taken from last month’s decision Victory House General Partner Limited v RGB P&C Limited  EWHC 102 (TCC). The second point concerns the freedom that an adjudicator has in making his or her decision.
In this case, the parties sought to overcome some commercial issues concerning payment and progress on a project to convert a former office building into an 87-bedroom hotel. As regards progress, a particular concern was getting a transformer installed. The upshot of their discussions was that they agreed three payments that were linked to the achievement of certain milestones. The second payment was linked to achievement of ‘power on’ and the third to delivery of testing and commissioning certificates in preparation for practical completion. They recorded what they had agreed in a ‘memorandum of understanding’ document, executed as a deed.
As is common, the document started with a series of recitals setting out the background. One of them (Recital D) became a point of focus in the dispute that followed. It read: ‘The Employer is wary of making further payments until the transformer is installed and operational so that meaningful progress can be made to completion.’
The employer made the first two payments and ‘power on’ was achieved, albeit later than anticipated. The contractor then made an application for payment under the payment provisions of the contract. When (according to the contractor) the employer failed to issue a payment notice or pay less notice, the contractor started an adjudication to claim the amount of his application. That led to arguments about whether the memorandum was legally binding and what is meant, in particular how it inter-related with the contract.
The contractor said the memorandum was not binding at all. The employer said it was binding and superseded the contractual payment provisions and the only payments due until achievement of the third milestone in the memorandum were those set out in the memorandum itself.
The adjudicator wrote to ask the parties what the meaning and effect of Recital D was. The contractor said it was just background. That is what recitals should be. They went on to say that if it had any effect it ended on ‘power on’. The employer said it recorded their reluctance to make further payments until there was significant progress to completion, which would be represented by the achievement of ‘power on’.
The adjudicator decided that the memorandum was legally binding and its effect was to suspend the payment provisions in the contract until ‘power on’. It is worth pausing here to draw the lessons to be learned from the story so far. First, take care to make sure that your understanding of what has been agreed matches that of the other party. That sounds obvious but failure to do so is often the source of subsequent dispute. Secondly, ask yourself how what has been agreed sits with the contract and what changes may have to be made to the contract. Thirdly, consider what will happen if things do not go to plan. Fourthly, record what has been agreed in a document that is clear and comprehensive. If you do not intend the arrangements to be binding, say so and do not enter into a deed (which suggests an intention to be bound). Fifthly, have someone review the document and consider whether it might be interpreted in a way that differs from what you intend. Finally and just in case, do not assume your view is right – give the required payment and pay less notices on time.
As mentioned above, there was a second point to take from this case. The adjudicator decided that the contractor was entitled to the payment it had claimed. The adjudicator’s conclusion as to the meaning and effect of the memorandum did not coincide entirely with the case put forward by either party. The employer said the adjudicator was not entitled to do that without giving them the opportunity to comment on his proposed interpretation. Accordingly, they said he had breached the rules of natural justice and his decision was therefore invalid. The court disagreed.
This is a difficult area for adjudicators. There are cases making it clear that the adjudicator should not make up a party’s case for them. On the other hand, an adjudicator is not stuck with making a choice between the precise cases made by each party. Usually, the adjudicator should seek the parties’ submissions where he or she considers that it may be appropriate to approach matters in a way not canvassed by either party. In this case, the adjudicator had done enough by way of the questions he asked the parties. In any event, when it comes to contract interpretation, the adjudicator is entitled to decide on an interpretation that differs from those put forward by the parties and does not have to seek further submissions from them on the point.
About the author: Mark Clinton is a partner and national head of construction and engineering at Irwin Mitchell LLP