If you want to keep lawyers out of your dispute, a third party decision can help – but be sure you record how binding it is

Resolving disputes by court or arbitration can be time consuming and expensive so parties often seek quicker and cheaper methods.

This can include agreeing to refer disputes to an independent third party (such as a lawyer or construction consultant) for a decision. The parties may agree that the decision will not bind them but will be used as a basis for settlement discussions; will be fully and finally binding; or will bind them temporarily – which means they will be bound to comply with the decision by, for example, making a payment decided by the third party. However, either party may refer the dispute to court or arbitration for a final decision.

Each type of decision can resolve disputes far more cost effectively than court or arbitration proceedings and can sometimes lead to parties preserving commercial relationships that would otherwise be lost.

However, the recent case of Khurana and Khurana v Webster Construction highlights the importance of the parties clearly recording the extent to which they have agreed to be bound buy the third party decision.

In this case, Webster was engaged by the Khuranas to undertake works to their house. There was a dispute about the final account. As the contract was with residential occupiers for works to a dwelling house, Webster did not have the right to refer to an adjudicator for a temporarily binding decision in accordance with the Housing Grants, Construction and Regeneration Act 1996. Nevertheless, the parties agreed to refer the dispute to an adjudicator and to be bound by the decision.

The adjudicator decided a substantial sum was due to Webster. The Khuranas then began court proceedings in relation to the dispute determined by the adjudicator. Webster applied for the Khuranas’ claim to be dismissed on the ground that they had agreed that the decision of the adjudicator was ‘binding’ on them.

 

The Khuranas argued that the adjudicator’s decision was unenforceable because it was unfair and not expressed in plain intelligible language

The Khuranas argued that the adjudicator’s decision was temporarily rather than finally binding and so were entitled to have the dispute finally resolved by the court; and that the agreement to refer to an adjudicator was unenforceable because, in breach of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR), it was unfair and not expressed in plain intelligible language.

The court rejected the first argument because, objectively construed, the correspondence between the parties evidenced an agreement that the adjudicator’s decision would be finally binding on them.

It also found that the agreement did not breach the UTCCR: it had been individually negotiated and there was no economic or legal imbalance between the parties. It held that the Khuranas knew they could not be forced to use adjudication and did not feel pressured into agreeing to it, and while adjudication’s short timetable and inability to recover legal costs were disadvantages, it was proposed to save both parties time and money. Webster had proposed adjudication in good faith and there was nothing intrinsically objectionable about the procedure, particularly since adjudicators are required to act fairly and apply the law. Finally, the language was sufficiently plain and intelligible.

Clients often ask architects for advice on how to resolve disputes without incurring the costs of lawyers. It can be quick and cost effective to instruct an independent third party to provide a decision which the courts will usually be reluctant to find unenforceable. However, the parties should ensure that they clearly record in writing whether the third party’s decision is intended to be non-binding guidance, temporarily binding or finally binding. Failure to do this can lead to the type of time consuming and expensive court proceedings parties hoped to avoid.


In Plain English – betterment
Betterment occurs where remedial works result in the client having a better or newer building than it would have had if the contractor had properly completed its original works. This might arise, for example, if remedial works are carried out several years after the building has been completed meaning that those elements of the building that have been repaired have not suffered the wear and tear associated with several years of use; or after a change in statutory requirements such as the Building Regulations – meaning that the remedial works have to be carried out to a higher standard than the original works. A reduction from the damages awarded to the client in respect of the cost of the remedial works will usually not be made to reflect the value of any betterment. However, a reduction may be made if a client chooses to carry out remedial works to a higher standard than is required.