How Adjudication has Transformed the Landscape for Construction Disputes Around the World

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How Adjudication has Transformed the Landscape for Construction Disputes Around the World

By Robert Hogarth*

Introduction

Adjudication as a compulsory statutory process was introduced in the UK as one of the measures in a compendious statute, the Housing Grants Construction and Regeneration Act 1996.   The provisions were amended by the Local Democracy, Economic Development and Construction Act 2009.  In this article references to 'the Act' are to the original legislation, now modified.

The objective of the Act is primarily to improve cash in the construction supply chain.  It does this in a number of key ways: 

  • Contracts for 'Construction Operations' of more than 45 days expected duration must provide for regular valuations and payments on account.  Although the legislation does not impose particular intervals, the industry standard valuation period adopted is monthly.
               

 

  • 'Construction Operations' are very widely defined.  Notable exemptions are: oil and gas drilling/extraction; mining for minerals; assembly, installation, demolition of plant or machinery in the nuclear, chemicals, pharmaceuticals, oil, gas , steel food and drink industries; the manufacture and delivery to site (but not installation) of building components and materials.
               

 

  • Contracts do not need to be in writing.  The Act imposes its own 'Scheme for Construction Contracts' where the oral (or written) contract is deficient.
               

 

  • A few classes of contract are exempt, notably:  contracts with residential occupiers; 
  • 'Pay to be paid' provisions are broadly outlawed.  So, unless as a result of insolvency, non-receipt of funds from an employer (or superior contractor in the supply chain) is not a lawful reason to withhold payment.
  • There is a prescribed mechanism and timetable for notifying what sum an employer must pay and by when.  Similarly employers must by a certain cut-off date notify their intention to make any deduction (for contra charges, delay damages etc.).
  • It requires construction contracts to make provision for Adjudication with key features:
                 
  • The mechanism must provide for the Adjudicator to be appointed within 7 days of the Referring Party giving Notice.
                 
  • The Adjudicator must give his decision within 28 days of the dispute being referred to him (with power to extend the timetable with the consent of the Referring Party by up to 14 days and for any extension longer than that by unanimous agreement). 
                 
  • It must allow disputes to be referred 'at any time'.  As a result contractual conciliation or mediation preliminaries to formal resolution cannot be enforced. 
                 
  • All UK standard form contracts now include adjudication provisions.  Other bodies publish their own, which can be adopted in their place.  If a qualifying construction contract does not contain rules that comply with the statutory mandate, the Scheme for Construction Contracts will apply.
  • Adjudication awards are 'temporarily' binding; until such time as they are superseded by a judgment of the Court or of an Arbitrator.  The Courts in the UK have been very supportive of the policy behind adjudication.  Where a party does not comply with an Arbitrator's award it is generally possible to get an enforcement order from the Court within 4-6 weeks.  Awards cannot be overturned summarily on the grounds that adjudicators got it 'wrong'.   Only where adjudicators act outside their jurisdiction or fail to observe the rules of natural justice or the relevant award turns on a point that can be summarily but finally determined in the course of the enforcement procedure will the Court interfere with awards.
  • There is a plethora of reported cases in this area and much of the work of the construction courts is taken up with considering challenges to adjudication awards.  That said only a very small proportion of adjudication awards end up being challenged in the Courts.


What are the advantages of Adjudication?

Evidently the biggest advantage to a party in dispute and seeking a remedy is speed.  The parties get a decision within 28 days of the Adjudicator's appointment.  Contrast that with litigation or arbitration which typically takes 1-2 years (or more) to reach trial.  It is not unknown for judges in the UK then to take more than a year to write their judgments after the trial has ended!  It is very common for contractors and sub-contractors to become bankrupt in the course of difficult projects.  Adjudication can provide rapid injections of cash that save construction businesses and jobs.  Cynical employers and main contractors will always try to throttle cashflow to force unfair settlements.  The remedy of adjudication goes some way to redressing the balance.

Hand in hand with speed goes economy.  Because adjudication is generally a 28 day process the costs are a fraction of what a party might incur in pursuing litigation or arbitration.  The latter typically take years and involve a (mostly) valueless formal discovery process, which rarely makes a material difference to the outcome.  In adjudication there is no formal process for disclosure of documents; parties simply exhibit the documents on which they rely (or which may be requested by the Adjudicator).  Generally the documents exhibited are comparatively few.   Skilful representatives can provide effective input at a cost proportionate to the sum in dispute.  It is also common for advisers to represent their clients for fixed fees, sometimes with an element conditional on success.

There are no restrictions on who may represent parties in adjudication and they are free to represent themselves without any professional help.    Most adjudication rules allow Adjudicators to act in an inquisitorial fashion, which is in contrast to the otherwise adversarial approach by judges and arbitrators in common law jurisdictions.  It does mean that even where parties are poorly served by their representatives, a good adjudicator can get to the bottom of a dispute and provide a sensible decision.

The legal profession in the UK is divided about the quality of adjudication awards.  Typically those who enjoy monopoly rights of audience in the Courts (barristers) are dismissive of adjudication and may say that the process is a 'lottery'.   Because in adjudication there are no restrictions on representation, the other main branch of the UK legal profession, solicitors, is more in favour of adjudication.

In general Adjudicators make good pragmatic decisions.  Apart from challenges on procedural and jurisdictional grounds, very few awards are reviewed on their merits and most parties accept the decisions, for better or worse.   In part this fatalism is driven by the exorbitant costs and time entailed in overturning an adjudicator's decision.  In general unless there are procedural flaws this can only be done by taking the dispute to litigation or arbitration.  However there is an obvious benefit in having a timely decision the parties can afford over having a decision they can't afford and after many years.

The fact is that if two parties cannot settle their differences and submit them to a third party to decide, there is always going to be a winner and a loser.  In that way adjudication is no worse than any other dispute resolution mechanism. 

Frequently adjudication is used for simple interim payment disputes; but by law in the UK it is available to be used 'at any time' for any dispute under a qualifying construction contract.  There is therefore an art to choosing for decision disputed elements of claims to influence the parties' negotiating position.  A good example might be where a contractor has left site before a contract is complete.  Typically there will be a dispute about whether it was the Contractor's or the Employer's breach that gave rise to the termination.  If the parties have an answer to that (which an adjudicator can give), resolving the rest of the dispute may not be so difficult. 

By contrast the Courts are generally very restrictive about the circumstances in which they will resolve such issues in isolation.  The parties cannot know until they issue proceedings whether the Court (or an Arbitrator) will agree to try preliminary issues and the Defendant may persuade the Court against it.  By contrast Claimants in the case of a disputed termination can simply frame disputed points to suit their strategic and tactical aims.  Adjudicators have to rule on the issues that are referred to them.  It is common for there to be a series of adjudications in complex disputes by which parties position themselves for eventual settlement negotiations.

What are the disadvantages?

There is a large number of adjudicators in the UK.  The Technology and Construction Solicitors Association (which publishes its own adjudication rules, like many other construction bodies in the UK) has around 70 Adjudicators on its panel.  This means that appointments are relatively infrequent and consistency of decision is harder to achieve.  There are even more adjudicators on panels run by other bodies, in particular the Royal Institute of Chartered Surveyors (RICS) which has much the largest panel and makes the most appointments.  However, as stated above, the general quality of decision making is adequate.

The biggest objections to adjudication are firstly 'ambush' and secondly what is sometimes termed 'Smash and Grab'.

Although the prescribed period to reach a decision is 28 days (unless extended by agreement), Referring Parties can (and do) spend as long as they like preparing the Referral.  It is undoubtedly at times tough for Respondents to pull together their Response (including all documentary and expert evidence) within the 7-10 days they generally get.  Respondents are in this way at a disadvantage.  Nevertheless adjudication can only be used for 'disputes', so if the claim has not already been rejected it cannot be adjudicated.  To this extent no adjudication can be said to be wholly unexpected.  Any party rejecting the claim of another knows that the dispute that arises thereby may be adjudicated.

Most adjudicators recognise and find ways of partly redressing the balance where a Respondent has been ambushed with something that cannot be dealt with in very short time.  In an extreme case Adjudicators may decide that the Respondent has not been given a fair chance to deal with a claim and in consequence the adjudicator cannot reach a decision in accordance with the principles of natural justice.  In particular Adjudicators are likely to be reluctant to find in favour of a Referring Party where their case is heavily supported by expert evidence (likely relating to issues of professional malpractice/negligence) if Responding Parties have not had the opportunity to obtain and table expert evidence of their own.

The term 'Smash and Grab' has been used to characterise attempts by contractors to secure opportunistic awards against employers who have failed to comply with the statutory regime for interim payments.   In a series of decisions the Technology and Construction Court has made it clear that it will not enforce 'technical' awards unless there has been strict compliance with the rules.

However these issues are not really an inevitable consequence of the adjudication process, but a function of on the one hand the chosen tempo of the process and on the other the mechanism for interim payments,  In other jurisdictions where other forms of adjudication have been adopted the timetable may be more prolonged and there may not be statutory default provisions for interim payments.

What is the take up worldwide?

Adjudication is being taken up in other common law jurisdictions around the world; for example Scotland, Australia, Malaysia and shortly Hong Kong.  Many standard forms of construction contracts have options for voluntary incorporation of the process, so that is now used voluntarily by parties who see its advantages.  It is incorporated across the board in the Facilities Management contracts under PFI/PPP contracts in the UK.  Although some aspects of FM would require submission of disputes to adjudication, its use is generally mandated for all disputes under the contracts

Conclusion

Adjudication has been successful in the UK in improving access to justice for parties to building contracts by offering a potent mix of speed and economy.  For companies doing business in the UK, it is nothing to be feared.  For legal systems where adjudication is not mandated,  it is worth investigating voluntary adoption – particularly in contracts where the governing law is of a jurisdiction where adjudication is used and there is in consequence a pool of experienced adjudicators available to determine disputes.


*Robert Hogarth is leader of the Construction & Projects team and a partner at RPC.  He is based in RPC's London office and can be contacted at robert.hogarth@rpc.co.uk.

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London,
Friday, July 7, 2017
Litigation (Civil, Business and Commercial), Real Property