Contract formation and adjudication

The case of Ellis Building Contractors Ltd v Goldstein relates to a particular form of statutory adjudication used in the United Kingdom on construction disputes.  It does however provide some interesting thoughts on how problems can arise in the formation of contracts and in the resolution of disputes.  

The original contract was entered into to for demolition, rebuilding, refurbishment and subsequent fit-out of a building.  

After negotiations, Ellis started work having received a Letter of Intent from Mr Goldstein. Both parties signed this document.  After work had started, this was replaced by a second Letter of Intent, which was again signed by of the parties, and increased the maximum amount that could be claimed by Ellis for work under that Letter of Intent.

It seems clear that the parties had assumed that a formal contract would be entered into at some stage, and were using the Letter of Intent as a holding process.   This is fairly common in construction contracts in the United Kingdom, although it has to be said, not particularly desirable!

Later on, Ellis sent out a signed contract form using a standard form (JCT 2005 Intermediate Form of Building Contract Revision 1-2007) called the IFC05 Contract.  It appears to have been their intention that this should replace the two previous Letters of Intent, but Mr Goldstein never signed the document, and the work proceeded with no further signed papers.

The matter obviously only came to court because there was a dispute as to the amount that should be paid, and Ellis issued a notice referring the dispute to adjudication.  As mentioned above, this is a statutory scheme for construction contracts in the United Kingdom (this particular dispute was in England) and requires the matter to be referred to an independent Adjudicator who makes a binding but non-final decision.  It is still possible for the matter to be re-opened in arbitration or litigation subsequently, but the experience has been that, in many cases, the adjudication becomes the final decision as the parties agree to accept the same.

Early on in the proceedings, solicitors acting for Mr Goldstein sent what they described as a “without prejudice” letter which set out the first Letter of Intent, but did not mention the second document, or the IFC05, and then went on to make a proposal on the basis of what they said was their client’s “commercial view of the matter”.  This offer was not accepted, and the matter proceeded to adjudication.

Ellis argued that the IFC05 applied, and therefore the caps in the two Letters of Intent were irrelevant as they did not form part of the contract.  Mr Goldstein argued that even if there were a contract under IFC05 it was subject to the cap in the second Letter of Intent (which would replace the first Letter).  

Unfortunately, Ellis then raised the “without prejudice” letter to show that at that stage Mr Goldstein had not been relying on the second Letter of Intent with its cap on liability, and had only referred to the first document.  This Letter should not, in truth, have been put before the Adjudicator as it was privileged under English law, having been written on a “without prejudice” basis, and could not therefore be founded upon to constitute an admission.  The matter then becomes further complicated because Mr Goldstein failed to object to the letter being produced, and the Adjudicator appears not to have appreciated that he should not really be looking at a “without prejudice” document.  

The Adjudicator ruled that the two Letters of Intent had formed a contract, but this had then been superseded by the IFC05 and that the latter had no cap and Mr Goldstein therefore had to pay whatever was due under the IFC05. Since Mr Goldstein had not produced any evidence as to the value of the works (presumably on the basis that the Letter of Intent gave him an absolute defence to everything in excess of the cap), the Adjudicator then ruled based on the valuation figures put forward by Ellis.  Perhaps not surprisingly, Mr Goldstein was not terribly happy.

However, nothing happened after the Adjudicator made his decision until Ellis sought to start enforcing the Adjudicator’s decision, and at that stage Mr Goldstein raised the fact that the “without prejudice” letter had been used in the adjudication as a basis for opposing a summary judgment application (that is one that assumes there is no possible defence to the claim, which would normally be the case on an adjudication award).  

The first argument was that the Adjudicator acted in breach of natural justice because he had determined the question of the IFC05 contract which had not been raised by either of the parties. The court dealt with this fairly shortly, saying that the whole issue of the nature of the contract and the basis on which the contract was formed was before the Adjudicator, and therefore he was entitled to rule as he did.

This seems frankly fairly straightforward.  Interestingly however they went on to say that even if the Adjudicator had made a ruling that was wrong in law or fact, the award would still be enforced.  This is, to be fair, a technical point on the interim adjudication provisions of the law concerned and does not necessarily have general application.  

The second argument that Mr Goldstein raised was there was what is known as “apparent bias” shown by the fact that the Adjudicator had allowed the “without prejudice” letter to be admitted and he should not have done so.  The court regarded the production of the letter as improper and indicated that if lawyers produced such documents at adjudication, they might face disciplinary action from their professional body.  

They clearly were prepared to be a little more generous when lay people were involved in making a mistake. They did say that where the Adjudicator’s decision is primarily based on documents that should never have been received, then the decision will not be enforced. They held that in this particular case, the document should never have been admitted and that this was a fault of the Adjudicator, but that they could not say that this had lead to an assumption that he had not been impartial.  

The lesson from this somewhat complex case is that it is always better to actually get the contract signed as quickly as possible, and not leave Letters of Intent out there to be argued over. Secondly, when conducting any sort of dispute process, great care has to be taken not to reveal documents that would otherwise be privileged and not available for use.

The argument is somewhat different in mediation and some other Alternative Dispute Resolution processes since those proceedings are themselves confidential and effectively conducted on a “without prejudice” basis, but where the is an adjudication, arbitration or litigation then great care needs to be taken not to disclose documents that could otherwise be held as confidential.  

Just to add to the confusion, there is an earlier decision in Scotland (but not England) from 1994 called Daks Simpson Group plc v Kuiper, which held that even if documents had been issued labelled “without prejudice”  they might still be disclosable if they contained clear admissions of fact. This is perhaps not quite as far from the English position as might appear to be the case, since even in England, merely putting the label “without prejudice” on a letter does not necessarily make it privileged if the contents are clearly not an offer to conclude the matter on a basis that is not necessarily related to the strict legal rights of the parties.

All in all it is probably best to speak to your lawyers before you start throwing these letters around!