OD Developments v Oak Dry Lining Ltd – a challenge to adjudicator’s jurisdiction

In OD Developments (‘OD’) v Oak Dry Lining Ltd (‘Oak’), the TCC made a rare decision not to enforce an adjudicator’s award on jurisdictional grounds. It was argued that a Letter of Intent between the parties did not appropriately incorporate the JCT 2011 Design and Build Contract (“the JCT contract”) and the adjudicator therefore lacked jurisdiction to consider the dispute.

The case, the most recent in a long line of cases highlighting the risks associated with letters of intent, is another reminder of the importance of agreeing unambiguous contract terms and conditions and seeking clarification from the other party where such terms are unclear.

Facts

OD was the main contractor on a project at 19 Bolsover Street in London. Oak was appointed as subcontractor to carry out dry-lining works. Oak began work under a binding Letter of Intent (‘the LOI’). The first paragraph of the LOI stated that it was the intention of the parties to enter into a formal contract based on the JCT contract. The LOI also stated that any dispute would be determined by adjudication under the Scheme for Construction Contracts (England & Wales) Regulations 1998 (‘the Scheme’). Practical completion of the works was by 5 December 2017.

Events took place as follows:

• On 29 March 2019, Oak issued an interim payment notice for the gross sum of £1,711,000. Oak subsequently received £983,000 from OD, leaving a balance of £728,000 outstanding.
• On 12 April 2019, OD sent a Pay Less notice stating that no sum was due to Oak but that it was owed a payment of £123,000 (in other words, Oak had been overpaid).
• On 13 May 2019, OD sent another Pay Less notice calculating that Oak owed OD a sum of £509,000, again based on an overvaluation of the subcontract works.
• On 22 July 2019, OD wrote to Oak enclosing OD’s calculation for Oak’s final subcontract sum. The value of Oak’s subcontract work had been further reduced, which resulted in Oak owing OD a sum of £625,000.
• On 26 September 2019, OD served its final payment notice, which repeated its claim for £625,000. Oak did not respond within 10 days but issued a default final payment notice and a pay less notice on 14 October 2019.
• On 16 October 2019, OD served its own pay less notice in response to Oak’s default payment notice.
• On 8 November 2019, Oak referred the dispute to adjudication under the Scheme. The adjudicator dismissed an objection by OD that he had no jurisdiction because he was not appointed in accordance with the terms of the LOI and/or the JCT Contract. He also dismissed the objection that he had no jurisdiction because under the JCT terms, a final notice was itself conclusive.
• The adjudicator held that, based on the parties’ intentions and subsequent actions, the Conditions of the JCT Design and Build subcontract had been incorporated by the parties and should be applied.
• The adjudicator assessed the true value of the works at £1,410,000 which, after deducting the payments made to Oak already, left a balance of £431,291.81 payable by OD.

After the adjudication, OD issued Part 8 proceedings challenging the adjudicator’s jurisdiction. It argued that the adjudicator’s decision should not be enforced as his appointment was invalid because (1) it was not made in accordance with the adjudication provision in the LOI (which OD alleged included the JCT contract terms) and (2) the final payment notice itself was conclusive and thus there was no true dispute.

Oak responded with a summary judgment application to enforce the adjudicator’s decision. It argued that the contract did not incorporate the JCT terms, the parties’ actions were governed by the LOI and the adjudicator was validly appointed under the Scheme. Alternatively, if the JCT terms were incorporated, then the final payment notice was non-compliant and had no effect. As the final payment notice was non-compliant, this would mean that Oak’s default payment notice was valid and conclusive, meaning that Oak was in fact owed £765,000 by OD.

Judgment

Jurisdiction

The court held that the notice of adjudication was wholly consistent with the LOI’s adjudication clause (despite not referencing the express clause), because it was sought under the Scheme and it sought appointment by the RICS, which is what the LOI adjudication clause required.

The court also addressed the conclusivity of the final payment notice. In Marc Gilbard 2009 Settlement Trust (trustees of) v OD Developments and Projects Ltd, it was held that the conclusivity provision does not prevent adjudication, but rather the admission of contrary evidence. In other words, if the JCT terms were incorporated and the final payment notice was validly issued, and all the other elements of conclusivity arose, Oak would not, in any adjudication, be able to adduce evidence to contradict the figures. In actual fact, the parties had differing views on whether the final payment notice was valid (if not, it would not be conclusive) and whether the JCT terms were incorporated in the first place. The judge held that it “cannot be right” that a claim by a party to rely on a conclusivity provision is sufficient to prevent adjudication.

Both points on jurisdiction were therefore rejected.

Incorporation of JCT Terms

The court held, from the wording of the LOI, that there were only two possibilities in contemplation. The LOI either applied by itself (with payment and other relevant terms contained within it) or there was a separate JCT contract that had been properly executed. There was no scenario in which the JCT terms were adopted through the LOI. As such, the Part 8 claim failed because the JCT terms were not incorporated into the LOI.

This finding meant that Oak’s work should be evaluated on a fair and reasonable basis under the terms of the LOI. As the adjudicator evaluated the work on the basis that the JCT terms were incorporated (which they were not), he had no jurisdiction to decide the adjudication. As such, the award in favour of Oak could not be enforced.

Whilst OD’s Part 8 claim failed in principle (the JCT contract terms did not apply), this was nevertheless detrimental to Oak’s application for summary enforcement.

Comment

The case illustrates the potential negative implications of unclear contract terms and conditions and the perils of adjudicating in such situations.

Parties should ensure that all terms, especially those regarding payment and dispute resolution, are unambiguous and are not open to dispute. Where there is any confusion as regards existing contract terms, parties are encouraged to seek clarification and reach agreement with other parties before disputes arise.

This case again confirms the risks of using letters of intent following much previous judicial commentary on the topic. Whilst there are sometimes commercial advantages to entering into a letter of intent before the final contract is concluded, it is very important that any letter of intent forms a “mini contract”. Otherwise the contractual position will be unclear if the contract is not actually entered into. As demonstrated by this case, simply stating that the parties intend to enter into a particular form of contract without stating what contractual terms will apply in the interim is unlikely to be sufficient.