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Introduction: 

This case study focuses on a dispute arising from a construction contract for the conversion of an office building into a twelve-bedroom house of multiple occupation (HMO). The dispute primarily revolved around the scope and price of the work, leading the parties to seek resolution through adjudication—a process specifically designed to expedite disputes in the construction industry. The case highlights the importance of formal contracts, the adjudication process, and the potential risks and benefits associated with such a method of dispute resolution. 

Background: 

Our client had purchased an office building intending to convert it into a residential HMO. They entered into a contract with a builder for the necessary works. However, instead of a detailed construction contract typical of such projects, the parties relied on a brief two-page agreement. This lack of clarity in the contract ultimately led to significant differences in the interpretation of the work’s scope, pricing, and valuation methods. 

The builder claimed £986,000 for the works, while our client asserted that only £570,000 was due—a substantial difference of nearly £416,000. Neither party had sought legal advice before entering into the contract, and as a result, the lack of a formal, detailed agreement contributed to the ensuing dispute. 

Adjudication Process: 

Given that the disagreement arose from a construction contract, the parties opted to resolve the matter through adjudication rather than litigation. Adjudication is a statutory right in construction contracts under the Housing Grants, Construction and Regeneration Act 1996, designed to provide a quick, interim decision that allows construction projects to continue without prolonged delays. The adjudication process typically lasts 28 days, extendable up to 56 days, far shorter than the two years litigation might take. 

In this case, adjudication was a logical choice to avoid the extensive costs and time associated with a court process. The parties presented only the documents they believed supported their respective cases, and rather than being decided by a judge, the adjudicator was a construction professional. This individual had wide discretion to make a decision based on the evidence provided. 

The Dispute: 

Our client’s position was that the contract agreed upon a fixed sum for the works, with variations to be valued on a fair and reasonable basis if no price was agreed during the works. The builder, on the other hand, believed that they were entitled to charge for every additional variation and recover the amount spent on materials and labour, plus a fixed uplift. 

In adjudication, the adjudicator ruled that our client should pay £292,000 of the disputed £416,000, rather than the full amount claimed by the builder. However, as adjudication decisions are not self-enforcing, the builder would need to court to enforce the decision if it actually wanted to be paid. 

Resolution: 

Prior to the builder commencing enforcement proceedings, we raised various arguments on behalf of our client. These included claims that the adjudication process had breached natural justice and that the decision was based on incorrect or insufficient evidence. This allowed us to negotiate a settlement for our client, significantly reducing the payable sum to £220,000. 

Crucially, we were able to secure favourable payment terms, allowing our client to pay the sum in instalments over an extended period, thereby avoiding the immediate financial burden that could have resulted from the adjudicator’s decision. 

Legal Insights: 

1. Importance of a Comprehensive Contract: It is of critical importance to have a comprehensive, detailed construction contract in place before undertaking any significant building project. A well-drafted contract should clearly outline the scope of works, payment schedules, variation procedures, and how the value of variations will be determined. In this case, the lack of such provisions led to misinterpretations and a substantial dispute between the parties. 

2. Regular Financial Reporting: Another key issue in this case was the builder’s failure to provide regular financial updates during the project. Our client was expecting to pay £560,000 but was suddenly presented with an invoice for almost double that amount. Had the contract provided for regular interim payments and valuations, both parties would have been aware of their respective positions earlier, allowing for the possibility of negotiation and resolution before the dispute escalated. 

3. Benefits of Adjudication: Adjudication proved to be a faster and less costly option compared to traditional court litigation. Our client’s legal fees in the adjudication process amounted to £40,000, including expert evidence from a quantity surveyor. In contrast, litigation would have likely cost over £100,000 and taken up to two years. Additionally, the drawn-out court process would have disrupted our client’s business focus, highlighting the practical advantages of adjudication in terms of both time and cost. 

4. Drawbacks of Adjudication: Despite its advantages, adjudication is not without its downsides. One notable drawback is that adjudication is a “costs neutral” process, meaning each party bears their own legal costs, regardless of the outcome. Furthermore, the losing party typically pays the adjudicator’s fees. In a court process, the winning party may recover some or all of their legal costs from the losing party, which is not the case in adjudication. This can make adjudication less appealing for parties with weaker financial resources. 

Conclusion: 

The importance of proper contractual planning, regular financial reporting, and the strategic use of dispute resolution mechanisms such as adjudication cannot be overstated in construction projects. Had these measures been in place from the start, it is likely that the costly and stressful dispute could have been avoided altogether. 

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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