A recent dispute between Murphy and a muckaway subcontractor throws up a lesson in drafting dispute resolution clauses. Theresa Mohammed reports.

Above: Theresa Mohammed is a partner in dispute resolution and litigation at law firm Trowers & Hamlins

Parties to construction disputes often enter into settlement agreements that seek to resolve their problems so they can move forward. Depending on the drafting of the agreement this could be a variation to the original construction contract or an entirely separate agreement. This distinction may not seem important but it is vital if the parties wish to use statutory adjudication to resolve future disputes as that will rely on the existence of a construction contract.

In 2013 J Murphy & Sons was engaged by Balfour Beatty Civil Engineering to carry out shaft and tunnel work on a project at Trafford Park, Manchester. Murphy appointed W Maher & Sons to remove spoil from site. Maher’s appointment dated February 2014 incorporated the NEC3 form of Construction Subcontract and option W2 provided that “Any dispute arising under or in connection with this subcontract is referred to and decided by the Adjudicator.” Oddly the contract also referred to the “TCC” meaning the Technology & Construction Court as the adjudicator nominating body (ANB) which is not helpful as the TCC does not function as an ANB. During the works Maher made 16 applications for payment and the balance claimed by Maher was approximately £300,000. In November 2015 the parties entered into settlement negotiations and the final account was agreed at £720,000 leaving a balance due to the subcontractor of £297,149. Murphy suggested that it would be preparing paperwork to close out the account but this was not received and no monies were paid.  On 3rd March 2016 Murphy wrote to Maher advising that its gross valuation of its final account was £483,529, did not refer to the agreement of £720,000 and made no further payment.

On 7th April 2016 Maher referred the payment dispute to adjudication in accordance with Option W2 and, after being prompted by the TCC, applied to the Royal Institution of Chartered Surveyors (RICS) for the nomination of an adjudicator. Murphy challenged the adjudicator’s jurisdiction on the grounds that Maher had no contractual basis for applying to RICS to nominate an adjudicator and the dispute arose under the settlement agreement and therefore could only be resolved via the court as that agreement did not constitute a construction contract. Maher started the adjudication afresh on 19th April 2016 following the Scheme for Construction Contracts as it believed that would be implied into the settlement agreement due to the error of the ANB. In response Murphy applied to the court for declaratory relief arguing that the adjudicator still did not have jurisdiction as the dispute did not arise under the construction contract.

The court held that the key question was whether the settlement agreement was a variation to the contract or was a standalone agreement. It was held that the original reference to adjudication had been properly made as the relevant parts of the NEC3 Standard Form complied with the Construction At and the reference to disputes “arising under or in connection with” was wider than the Act required and this language would have covered disputes arising out of the settlement agreement. It was also said that the reference to the TCC was not helpful as that was not an ANB, but the Construction Act did not stipulate that this was required and errors such as these generated confusion and costs.  

So the message here is that if parties do not wish for adjudication to be available in relation to disputes under settlement agreements then it is imperative that the definition of disputes referable to adjudication under the original construction contract is checked and that such agreements are drafted to be standalone documents. If they are not, there is a good chance they will be interpreted as variations to the construction contracts and adjudication will be available to both parties.

About the author: Theresa Mohammed is a partner in dispute resolution and litigation at law firm Trowers & Hamlins