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Commercial Law - Adjudication and the Consumer

In recent years it has become commonplace for a consumer-employer to seek to challenge an adjudicator’s decision in favour of a contractor on the basis that the adjudication provisions should be struck down pursuant to the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”). However, since the obiter statements of HHJ Toulmin CMG QC in Picardi v Cuniberti [2003] BLR 487, opened the door to such arguments, the TCC have gone to great lengths to close it again and following the recent decision in Domsalla v Dyason [2007] EWHC 1174 it seems that the UTCCR argument will be difficult to sustain for most parties.

Background to UTCCR

UTCCR Regulation 8 provides that an unfair term in a contract concluded with a consumer by a seller or supplier shall not be binding on the consumer. Consumer in this context means any natural person who, in contracts covered by the Regulations is acting for purposes, which are outside his trade, business or profession (Reg. 4).
 
Pursuant to Regulation 5(1), a contractual term which has not been “individually negotiated” should be regarded as unfair if, contrary to the “requirements of good faith”, it causes a “significant imbalance” in the party’s rights and obligations arising under the contract to the detriment of the consumer.
 
Further, Regulation 5(2) states that “a term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has, therefore, not been able to influence the substance of the terms”. Regulation 5(3) goes on to state that notwithstanding that a specific term or certain aspects of it in a contract has been individually negotiated, these Regulations shall apply to the rest of a contract if an overall assessment of it indicates that it is a pre-formulated standard contract.
 
Finally, Schedule 2 provides an indicative list of the types of clauses that may be regarded as unfair and includes at paragraph 2(1)(q) terms which have the object or effect of:

“excluding or hindering the consumer's right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to the applicable law, should lie with another party to the contract.”

The potential impact in residential development is clear; particularly where the form of contract adopted seeks to impose adjudication provisions on a party who is or may be considered a consumer.

The Residential Occupier

The most common consumer contract in the construction industry is the contract to develop or build a dwelling house for the prospective occupant. Pursuant to section 106 of the Housing Grants, Construction and Regeneration Act 1996 (“the 1996 Act”), statutory adjudication procedures do not apply to construction contracts made with a residential occupier, meaning a party who occupies or intends to occupy the dwelling which is the subject of the contract. Accordingly, unless the contract expressly provides for an adjudication procedure, the 1996 Act will not assist.  
 
This provision is becoming less and less important as consumers are becoming more sophisticated and more domestic contracts are undertaken on JCT and other forms of minor and intermediate works contracts which will routinely include adjudication provisions. Despite some initial scepticism as the 1996 Act came into force, there is nothing in the Act which prevents a residential occupier from subscribing to any contractual dispute resolution procedure, including adjudication.

The Decision in Picardi v Cuniberti

Picardi was an architect and sought a declaration that his contract of engagement incorporated the RIBA Conditions of Engagement (CE/99) and the CIC model adjudication procedure and also sought enforcement of the adjudicator’s award made following a referral under those provisions.
 
HHJ Toulmin CMG QC found as a fact that CE/99 and the adjudication provisions were not incorporated and that therefore the adjudicator’s award could not be enforced because the employer was a residential occupier and therefore the statutory scheme did not apply.
 
However, the Judge went on to consider the effect of UTCCR. It was not in dispute that the adjudication provisions had not been individually negotiated and the Judge took the view that the key issues were “good faith” and whether the provisions would cause a “significant imbalance” in the parties’ rights and obligations. He cited the well known passage from Lord Bingham in  Director General of Fair Trading v First National Bank plc[2001] UKHL 52 at [17] where he described significant imbalance as:

“The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties' rights and obligations under the contract significantly in his favour. This may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty. The illustrative terms set out in Sch 3 to the regulations provide very good examples of terms which may be regarded as unfair; whether a given term is or is not to be so regarded depends on whether it causes a significant imbalance in the parties' rights and obligations under the contract. This involves looking at the contract as a whole. But the imbalance must be to the detriment of the consumer …"

He also cited the approach of Lord Millett to the assessment of unfairness to the detriment of the consumer [2001] UKHL 52 at [54]:

"There can be no one single test of this. It is obviously useful to assess the impact of an impugned term on the parties' rights … by comparing the effect of the contract with the term and the effect it would have without it. But the inquiry cannot stop there. It may also be necessary to consider the effect of the inclusion of the term on the substance or core of the transaction; whether if it were drawn to his attention the consumer would be likely to be surprised by it; whether the term is a standard term, not merely in similar non-negotiable consumer contracts, but in commercial contracts freely negotiated between parties acting on level terms and at arms' length; and whether, in such cases, the party adversely affected by the inclusion of the term or his lawyer might reasonably be expected to object to its inclusion and press for its deletion. The list is not necessarily exhaustive; other approaches may sometimes be more appropriate."

On balance, the Judge concluded that an adjudication procedure which “will cause irrecoverable expenditure in either prosecuting or defending it, is something which may hinder the consumer's right to take legal action” and he gave particular emphasis to the fact that parliament deliberately excluded the residential occupier from the 1996 Act.
 
He also concluded that taken together with the other clauses in CE/99, such as cll 5.10 and 5.11 (the inability of the client to withhold payment); cl 7.3 (limitation of architect's liability); cl 7.5 (third party agreements) and cl 9.6 (costs), the adjudication provisions would cause a significant imbalance in the rights and obligations of the parties. The Judge concluded by observing that “it is, of course, not coincidental that the RIBA guidance clearly requires their members individually to negotiate these clauses” and held that if he had concluded that the terms were incorporated, he would, in any event, have found that the adjudication provisions would be excluded by reason of the UTCCR.

The TCC’s Retreat

In Lovell Projects v Legg & Carver [2003] BLR 452, the employers were again consumers and residential occupiers who engaged a contractor in relation to the refurbishment of a dwelling house. They contracted on the basis of the JCT contract for minor building works 1998 edition and incorporated the contractual adjudication provisions. The employers had the benefit of an architect to assist with the tender process and there were rounds of negotiations in which the employers insisted on JCT MW 1998. When opposing the enforcement of an adverse adjudicator’s decision, the employers argued that the adjudication provisions had never been brought to their attention.
 
HHJ Moseley QC, held that the arguments under UTCCR had little application in a case where the consumer had access to advice from their contract administrator and/or solicitor and chose not to avail himself of that advice. He also went on to state that

“It has been conceded by the contractor that the adjudication terms in the Minor Works contract were not in this case individually negotiated for the purposes of Regulation 5(1). That concession is clearly justified; the adjudication terms agreed between the parties were in the standard form provided for in the minor works contract.”

and

“I do not regard paragraph (q) as having any relevance to those terms in the Minor Works contract which provide for adjudication. Those terms do not exclude or hinder the consumer’s right to take legal action or exercise any other legal remedy. On the contrary an adjudication only binds the parties until the dispute or difference is resolved by legal action, arbitration or agreement…”

UTCCR raised its head again before HHJ Thornton QC in Westminster Building Co Ltd v Beckingham [2004] BLR 163.  The contractor tendered for the refurbishment of a residential property owned by the employer based on a specification prepared on behalf of the employer by a firm of Chartered Surveyors. It was held that the contract was made on the JCT intermediate form of contract and incorporated the adjudication provisions set out therein. The employer contended that the adjudication clause in the contract was not binding on him since it was unfair within the meaning of the Unfair Terms in Consumer Contracts Regulations 1999. The Judge held that:

“1.      The terms in this case were not individually negotiated but were couched in plain and intelligible language.
2.      The terms of the contract were decided upon by Mr Beckingham’s agent, who are chartered surveyors, and Mr Beckingham had, or had available to him, competent and objective advice as to the existence and effect of the adjudication clause before he proffered and entered into the contract. Westminster did no more than accept the contract terms offered and had no reasonable need to draw to Mr Beckingham’s attention the potential pitfalls to be found in the adjudication clause and in its operation during the course of the work. The clause did not, therefore contravene the requirement of good faith…
3.      The clause did not, if considered at the time of making the contract, constitute a significant imbalance as to Mr Beckingham’s rights…
4.      The clause does not significantly exclude or hinder the consumer’s right to take legal action or other legal remedy or restrict the evidence available to him…”

This decision appeared to have given credence to the remarks in Lovell suggesting that the incorporation without amendment of any of the standard adjudication provisions would mean that they had not been “individually negotiated”. It also seemed to close the door for employers who were acting with the assistance of construction professionals during the tender / negotiation process.
 
In, Bryen & Langley Ltd v Martin Rodney Boston (2004) 98 ConLR 82, HHJ Seymour QC gave a lengthy obiter judgment on the effect of UTCCR. He felt that “an important feature” of the facts in Picardi was that the RIBA terms and the adjudication provisions were put to the employer by the architect, who then became the claimant. Of course, in both Lovell and Westminster the form of contract had been selected by the employer and/or his agent and accepted by the contractor. The Judge also made a number of general comments, which have been endorsed by the Court of Appeal, about the application of UTCCR to adjudication clauses:
 
(a)      a term of a contract not individually negotiated is only to be regarded as unfair if it causes a significant imbalance in the parties' rights 'contrary to the requirement of good faith'. It is difficult to envisage circumstances in which a contractor who accepts a form of contract proffered by a consumer could be criticised as having acted contrary to the requirement of good faith.
(b)      if it is alleged that a contractor has acted in bad faith by letting a consumer choose the form of contract it is likely to be a complete answer that the 'consumer' made his own decision, with or without the advice of a third party.
(c)      it is at least arguable that where the consumer has chosen to adopt a particular form of contract, he has in fact been able to “influence the substance of the relevant term”, and therefore the term could be regarded as having been individually negotiated.
(d)      The concept that adjudication as a process causes a significant imbalance in the parties' rights and obligations is a difficult one. It seems a bold thing to envisage that a procedure created and approved by Parliament for the resolution of disputes, albeit on an interim basis, by someone bound to act impartially and subject, at the enforcement stage, to a degree of supervision by the court, could properly be stigmatised as unfair or producing a significant imbalance in the rights of those potentially involved in the procedure.
(e)      The fact that Parliament, in s 106(1) of the 1996 Act, did not see fit to include the residential occupier within the ambit of Pt II is irrelevant to the question whether, if a consumer agrees by his contract to adjudication, the term by which he does so is unfair.
 
The reasoning in Bryen & Langley was also applied against the employer by HHJ Coulson QC (as he then was) in Allen Wilson Shopfitters v Buckhingham (2005) 102 ConLR 154.

Domsalla v Dyason

In this case, the Defendant’s house was severely damaged by fire and his insurers decided to reinstate the property. They appointed loss adjusters to act, both in their capacity as loss adjusters and also to provide surveying services. On the loss adjusters' advice a contract was entered into with the Claimant on JCT minor works terms and was signed by the Defendant 'as agent'. The choice of form and the arrangements were made by employees of the loss adjusters. Works were not completed on time, there were disputes about non-payment of certified sums and the Claimant suspended work. The Claimant referred the issue to adjudication and succeeded. The Defendant opposed the enforcement of the award on several bases, including that the adjudication clauses could not be enforced against him under UTCCR.
 
HHJ Thornton QC held that it is clear that an adjudication provision is capable of being given effect to by terms of a contract even if the statutory scheme is not applicable because the employer is a residential occupier and that such a term will operate without statutory backup provided that it will, in any consumer contract be subject to the overriding principles of contract interpretation and to the UTCCR.
 
The Judge found that the adjudication provisions of the contract were not unfair. Significantly, the Judge appears to have found that the adjudication provisions of the JCT minor works agreement themselves do not in any event cause a significant imbalance in the parties’ rights and obligations. He stated that:
         
“… the adjudication provisions, even if proffered by the contractor in circumstances which would make it procedurally unfair for the contractor to rely on them vis-à-vis a consumer, do not cause a significant imbalance in the parties' rights and obligations.”
 
He found that adjudicators had to meet minimum standards of fairness and impartiality, whether or not they were legally trained and that adjudication is a rapid, cheap and temporary legal process similar to the summary judgment procedures available in court. The judge also emphasised that any decision may be overturned in a subsequent arbitration or piece of litigation.
 
The Judge concluded that, although may have been potentially unfair for the Claimant to rely on the adjudication provisions, such reliance is not rendered unfair by the UTCCR because it does not substantially alter the balance of the parties' rights and obligations.

Are these Decisions Right?

The cases discussed above clearly indicate the approach of the TCC to challenges to adjudicators’ decisions based on UTCCR; however, one must ask whether these decisions are correct.
 
Certainly the overriding view that adjudication provisions do not cause a significant imbalance in the parties’ rights is jurisprudentially uncomfortable. HHJ Toulmin CMG QC identified, in Picardi that if an adjudicator is powerless to award costs then this may have the result of forcing a consumer down an expensive dispute resolution path with no prospect of costs recovery. Further, the argument that the adjudication provisions, by their nature as a summary procedure, do not affect either party’s right to litigate their dispute, appears to overlook the potentially crippling effect on a consumer of the interim enforcement of an adjudicator’s decision pending final resolution of the dispute. Finally, the argument that a procedure conceived in parliament cannot be stigmatised as unfair overlooks the fundamental fact that parliament also saw fit not to apply its statutory procedure to residential occupiers.
 
It is easier to understand the rationale behind the decisions on consumers who choose the form of contract, whether or not they are acting through professional intermediaries; clearly, a contractor who is dealing with a consumer who insists on a form of contract or who deals through the consumer’s contract administrator should be entitled to assume that he is free to enter into a contract without challenges to his fides.
 
However, the potential extension to cover contracts proffered by the contractor suggested in Domsalla is another cause of concern. UTCCR were implemented in order to prevent businesses in a stronger bargaining position from insisting on unfair standard terms in dealings with consumers. The decision in Domsalla seems to fly in the face of these intentions.

Conclusions

Following Domsalla, it is unclear whether a challenge made to an adjudicator’s decision on the basis that the adjudication provisions should be struck down by UTCCR can still be maintained with any reasonable prospect of success. It has been suggested that the UTCCR argument may be available “only in cases where the consumer would otherwise fall outside the sphere of adjudication altogether (because, for example, the works were concerned with a private dwelling house…” (HHJ Coulson QC, as he then was, in Construction Adjudication 2007 OUP, para 9.58). However in light of Domsalla, that view may be considered too generous.
 
From the treatment given to UTCCR arguments in recent times, it is possible to draw some general guidance:
 
(a)      Consumers are entitled to subscribe to any dispute resolution mechanism, including adjudication; however, the terms of any such agreement must be scrutinised.
(b)      If the form of contract is the JCT Minor Works contract or contains adjudications provisions that are substantially the same, it is likely that the adjudication provisions will not be deemed to cause a “significant imbalance” in the parties’ rights and obligations.
(c)      If the form of contract is proffered by the consumer or his agent then the adjudication provisions may be deemed to have been individually negotiated.
(d)      In any event, if the contract is proffered by the employer or his agent then this is likely to be a complete answer (whether because the clause has been individually negotiated or because the contractor has acted in good faith).
(e)      Even if the form of contract is proffered by the contractor, Domsalla suggests that the adjudication provisions will still not fall foul of UTCCR.
 
It seems therefore that the only circumstances in which the UTCCR argument is likely to succeed will be where the contract is (i) proffered by the contractor, (ii) contains provisions more onerous than those contained in the JCT Minor Works agreement, and (iii) where the consumer has no recourse to professional advice. In any event, practitioners should be alive to the fact that it will be very difficult in most circumstances to challenge an adjudicator’s decision by reference to UTCCR.