The Housing Grants Construction And Regeneration Act ("the Construction Act") essentially does three things:
- it gives the right to refer disputes under a Construction Contract (as defined) to adjudication;
- it gives the right to payment by instalments and a right to suspend work if payment is not received; and
- "pay when paid" clauses are ineffective.
This paper discusses the new right to adjudication.
Adjudication
The inspiration for the legislation was the Latham Report and the centre piece of Sir Michael Latham's ideas for ridding the construction industry of its litigiousness was adjudication of disputes by someone independent of the Contract Administrator.
The Latham report itself and the weight of comment since has considered adjudication in relation to main contracts and subcontracts but the definition of "Construction Contracts" includes an agreement to provide professional services so adjudication is also available to the professional team.
The benefit of adjudication is to provide a "quick and dirty" dispute resolution procedure by which:
- disruption to progress on site is minimised;
- cash flow is secured;
- costs are contained;
- relationships are preserved; and
- either party may take the dispute on to arbitration or litigation if dissatisfied
It has to be said that these benefits are unproved . Adjudication does not have much of a track record in the UK. The only real experience of it in action is in relation to settling the extent of a main contractors right to set off under the domestic form of subcontract, DOM/1. It has also been available as an option under JCT '80 and '81 but it is little used.
Adjudication is being used in an entirely new way in the Construction Act . In the past it has been confined to deciding questions of quantum where the principle in issue has already been decided by someone else, either the architect or the courts. Now it is to cover exactly the same ground as is already covered by arbitration - that is to say "any dispute or difference".
A commonly asked question is "how can adding another stage to the dispute resolution process reduce costs?" There is no published research to support the proposition that it does, but there is empirical evidence from the Channel Tunnel project and from the US which suggests that multi stage dispute resolution procedures reduce litigation by allowing disputes to blow themselves out after the initial stages. Disputes are often begun in anger and settled in boredom.
S108 of the Construction Act sets out the minimum requirements for an adjudication procedure which must be included in a Construction Contract. Each Contract must provide that:
- an adjudication notice may be given at any time ;
- a timetable must be provided for the appointment of the adjudicator within seven days of service of the notice;
- the adjudicator must reach his decision within 28 days of the referral subject to an agreed 7 day extension;
- the procedure must impose a duty on the adjudicator to act impartially; and
- the procedure must enable the adjudicator to take the initiative (like an exercising magistrate) in ascertaining the facts and the law.
If the Contract fails to provide for these minimum procedural arrangements in any respect then any party wishing to pursue adjudication must adopt the statutory "Scheme for Construction Contracts" (the "Scheme") in its entirety.
The Scheme is a statutory procedure which applies in default of one which satisfies the requirements of S 108. It has been published in final draft form. It is very prescriptive and the general consensus of opinion is that Construction Contracts will quickly adopt the minimum requirements in S108 rather than force the parties to fall back on the Scheme.
There are a number of major problems with the procedure in S108 and in the draft Scheme for Construction Contracts, these appear to be:
1. Is it Arbitration?
S108 refers to "any dispute or difference" so questions of law such as the validity of the contract itself which were previously the exclusive preserve of an Arbitrator or the Courts now fall to be decided by an adjudicator.
Adjudication procedures are going to have to be carefully drafted to avoid becoming arbitration and suffering from all its perceived problems such as an obligation on the adjudicator to observe the rules of natural justice and the parties right to appeal points of law.
2. "Temporary Finality"
The adjudicators decision is "final" until "finally decided" in arbitration or litigation. Consequently, the parties may rely upon an adjudicators decision which is subsequently overturned by an arbitrator or a court . For example, what would happen if a subcontractor relied on an adjudicators decision to the effect that he had validly determinated his sub-contract and left site only to have that decision overturned in arbitration? Would he liable in damages? Probably there will have to be a reciprocal contractual indemnity from liability arising out of reliance on an incorrect adjudicators decision. Will the Adjudicator then be liable for having made the wrong decision? Certainly he has no quasi judicial immunity.
3. Enforcement
An adjudicators decision is not a judgement and so, to have any effect in law, the contract will have to contain a discrete obligation to comply with the adjudicators decision. For example the Scheme provides that payment of sums ordered by an adjudicator is to be made within seven days of his decision. In the right circumstances a party on the wrong end of an adjudicators decision might be well advised to ignore it and take his chances in litigation or arbitration. Establishing damages against the reluctant party in those circumstances may prove difficult.
4. Conflict with the Supervising Officer
Adjudication could become a second opinion available to any contractor disgruntled with an architects certificate. That may be healthy in promoting impartiality on the part of Contract Administrators everywhere. However the Contract Administrator is not bound by the adjudicators decisions (not being a party to the Contract) and he can continue to act according to his own judgement. It follows that there is a real risk of conflicting decisions.
For the same reason Main contractors must ensure that the same adjudicator and adjudication scheme apply to the main contract and sub contracts or they may find themselves suffering conflicting adjudicator's decisions.
5. Costs
The Scheme specifically excludes any power for the adjudicator to deal with costs other than his own fee so presumably they will fall where they lie. That will probably create an inherent disincentive to bring small claims to adjudication which is unfortunate. We expect something like American litigation tactics to develop whereby parties will be encouraged to settle adjudicated disputes simply to avoid the wasted costs.
6. Resort to the courts or arbitration
Even though an adjudication may be on foot there is nothing preventing either party taking the same issue straight to arbitration or the courts, although the Scheme says that the parties may agree not to do so "for a specified period or until practical completion of the contract". Whether that agreement is valid must be doubtful because it would amount to an attempt to oust the jurisdiction of the courts.
Conclusion
From all parties point of view the adjudication provisions of the Construction Act are to be welcomed. There may be some issues to be tested in the courts over the next few months but it is to be expected that a new profession of "Adjudicator" is about to be born. Two of our partners, Peter Hall and Peter Rees, are ORSA trained Adjudicators and Christopher Hill is a Chartered Institute of Building's trained adjudicator and a member of their panel. We are also ready to help with the drafting of adjudication provisions. Certainly it looks as though neither Employers nor main contractors will want to find themselves saddled with the Scheme for Construction Contracts so bespoke adjudication provisions are going to be the order of the day for the time being.
This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.