The Impact Of Legislative Amendments On Adjudication - Construction & Planning

Introduction

As you will be aware, Part 8 of the Local Democracy, Economic Development and Construction Act 2009 ("LDEDC 2009") will make amendments to Part II of the Housing Grants, Construction and Regeneration Act 1996 (the "Construction Act"), which includes amendments to the adjudication provisions. Such changes became effective from 1 October 2011 in England and Wales and will become effective on 1 November 2011 in Scotland.

Further, the Construction Act is supplemented by the Scheme for Construction Contracts (England & Wales) Regulations 1998 (SI 1998/649) (the "1998 Scheme"). The 1998 Scheme was also amended and the following Regulations are due to come into effect as of 1 October 2011 (for England and Wales) and 1 November 2011 (for Scotland):

Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011
Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (Wales) Regulations 2011
Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (Scotland) Regulations 2011.

(Which together shall be referred to as the "2011 Scheme").

The main legislative changes

The main changes to the adjudication provisions can be summarised as follows:

Construction contracts no longer have to be evidenced in writing;
The introduction of a statutory slip rule
The prohibition on the parties agreeing who will pay the costs of adjudication before a Notice of Adjudication has been served
Confirmation of the Adjudication Timetable and when time starts to run; and
The way in which "Exclusion Orders" can be made.

When will the changes take effect?

While it has been noted above that the legislative changes became effective as at 1 October 2011 (or will become effective on 1 November 2011 in Scotland) there is likely to be a period of overlap in the use of the old and new provisions.

The payment provisions under the old regime will continue to apply to contracts entered into before the 1 October 2011/1 November 2011 but the new provisions will apply to contracts entered into after the effective date.

Details of the changes in legislation

Contracts no longer have to be in writing

The most significant change to the adjudication provisions of the Construction Act is the repeal of section 107. The Construction Act will apply to construction contracts that are written, only partially in writing or entirely oral. It is believed that this will lead to:

More disputes being referred to adjudication
An increase in the number of adjudications being governed by the Scheme, as the Scheme will apply in the absence of the requisite adjudication provisions contained in the contract (see paragraph 4.2.2 below)
An increase in disputes concerning the terms of the contract and possibly therefore an increase in the number of jurisdictional challenges
An increase in the number of disputes referred to the TCC.

What about the adjudication provisions, do they still have to be in writing?

On the one hand the Construction Act as amended by the LDEDC 2009 provides that the following provisions must be in writing:

That a party can give notice of adjudication at any time (section 108(2)(a));
That a timetable to appoint an adjudicator and serve the Referral Notice is within 7 days of the Notice of Intention to Refer the dispute to adjudication (section 108(2)(b))
That the adjudicator has 28 days within which to reach his decision (section 108(2)(c))
That the adjudicator can extend the deadline for delivery of his decision by up to 14 days with the agreement of the Referring Party (section 108(2)(d))
That the adjudicator must act impartially (section 108(2)(e))
That it is for the adjudicator to determine the law and facts (section 108(2)(f))
That the adjudicator's decision is binding until it is finally determined by litigation or arbitration or an agreement is reached between the parties (section 108(3))
That the adjudicator is entitled to correct any typographical or clerical errors within 5 days of the decision being produced (section 108(3A))
That the adjudicator is not liable for anything done or omitted to be done in the discharge of his functions, unless there is an element of bad faith (section 108(4)).

On the other hand, if the provisions are not in writing, then section 108(5) of the Construction Act, which has not been amended, provides that the Scheme (as amended) can be implied into the construction contract.

Are there any practical issues where contracts are not in writing?

This repeal of section 107 is likely to lead to a rise in adjudications because the scope of contracts to which the legislation applies is clearly widened. However, it is likely to also give rise to a number of jurisdictional challenges on the basis that there is no contract. This may occur particularly where there have been extensive pre-contract discussions and documents have been created to record conversations or agreements in principle as to the mechanisms of a contract. In such situations it would be advisable to clearly mark such communications / documentation as "subject to contract" in order to avoid there being persuasive evidence that a contract was in fact created and can be evidenced by the pre-contractual discussions / documentation.

Costs of Adjudication

The change in relation to the costs of an adjudication can be found in section 108A(2)(b) of the LDEDC 2009. This provides that parties will not be permitted to pre-agree the allocation of their own adjudication costs in the adjudication. Such agreements can only be made in writing after the issue of the adjudication referral notice. In practice, it is highly unlikely that this will actually happen – it is difficult to envisage in what circumstances this may occur.

A construction contract can provide for the adjudicator to have the power to allocate his fees and expenses between the parties (section 108A). However, the parties are not allowed to ask the adjudicator to allocate liability for their own costs of the adjudication (section 108A(2)).

The purpose of the amendment was to outlaw so called Tolent clauses which originated from the case of Bridgeway Construction Ltd v Tolent Construction Ltd (2000) CILL 1662. It was held in this case that it was not contrary to the provisions of the Construction Act for the parties to have agreed that the Referring Party should bear all the costs of the adjudication. Following this case clauses or agreements about costs made prior to the adjudication were referred to as "Tolent clauses" and considered to be acceptable.

However, following the case of Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC) it was considered that a party's ability to bring an adjudication "at any time" would be fettered if it had to bear in mind the costs of proceeding with the adjudication against the likely recovery. In this case, such a clause was considered contrary to the provisions of the Construction Act.

Slip Rule

Construction contracts will be required to allow for an adjudicator to correct a clerical / typographical error in his decision (the 'Slip Rule') (section 108(3A)).

This amendment was derived from the case law of Bloor Construction (UK) Ltd v. Bowmer & Kirkland (London) Ltd [2000] BLR 314, where it was found that an adjudicator is entitled to correct a clerical or typographical error in his judgment as long as it did not impact on the decision that he had reached.

It should be noted that while the case of Bloor only applied in England & Wales, there is no such authority in Scotland (where the case of Bloor would merely be persuasive). However, as of 1 November 2011, the rule will apply equally in Scotland when the LDEDC 2009 and the 2011 Scheme come info force.

The Scheme prescribes that such amendments can only be made within 5 days of the judgment being provided.

The Adjudication Timetable

There is a small change to the commencement date of an adjudication, in that an adjudicator will have to advise the parties of the date he received the Referral Notice and the Decision will be due 28 days after "receipt", instead of the date of the Referral Notice.

This is unlikely to have a big impact, but it is noted that the word "receipt" is not defined.

Exclusion Orders

By virtue of section 105 of the Construction Act, certain activities are excluded from the definition of construction operations – i.e., the Construction Act does not apply to them.

By virtue of section 106A (introduced by the LDEDC 2009) the Sectary of State (or Welsh or Scottish Ministers, as appropriate) is given the power to modify or indeed replace the exclusions, so that Part II of the Construction Act (as amended by the LDEDC 2009) would not apply in whole or in part to a particular class of construction contract. At the moment an exclusion order will disapply the whole of Part II of the Construction Act.

As at the effective date the following exclusion orders will apply to construction contracts:

Construction Contracts (England) Exclusion Order 2011
Construction Contracts (Wales) Exclusion Order 2011
Construction Contracts (Scotland) Exclusion Order 2011.

What amendments have been made to the adjudication provisions of the JCT contracts as a result of the legislative amendments?

The amendments to the legislation relating to adjudication have not necessitated a change in the wording and terminology of the JCT Contracts. This is because the JCT contracts as currently drafted provide that the 1998 Scheme will apply as amended and in force from time to time to any adjudication.

The only change in relation to the adjudication provisions in the 2011 Edition of the JCT (Standard Building Contract and Design and Build) is the change of the Adjudication Nominating Bodies.

In December 2009, the court ordered the Construction Confederation to be wound up because it had a £20 million pension deficit. The JCT has therefore replaced the Construction Confederation with "constructionadjudicators.com" (this is the trading name of Contractors Legal Group Ltd). There are currently 26 adjudicators listed on the site, including Christopher Miers, Peter Aeberli, John Riches and Victoria Russell, to name but a few.

The second change to the Adjudication Nominating Bodies is the replacement of the National Specialist Contractors Council ("NSCC") with the Association of Independent Construction ("AICA") Adjudicators. The NSCC appears to have changed the process of nominating adjudicators and outsourced this work to a partner company AICA, which now nominates adjudicators on the NSCC's behalf.

Arbitration

While on the subject of changes to the dispute resolution provisions in the 2011 Edition of the JCT suite of Contracts, it should be noted that there is to be a small change with regards to arbitration.

If the parties select arbitration over litigation but do not vary the relevant clause, then the JCT Rules relating to arbitration – the Construction Industry Model Arbitration Rules ("CIMAR") – will apply. It is noted that the 2011 changes to the JCT contracts refer to the new 2011 edition of CIMAR. However, it is beyond the scope of this paper to discuss those changes here.

It is not anticipated that this change will have a huge impact (if any) on the way that disputes are determined under the JCT Contracts: the default position being that parties will refer disputes to litigation unless they specifically choose arbitration.

Conclusion: Will these changes make any difference to the number of adjudications?

Commentators are of the view that the changes to the Construction Act and the Scheme are likely to increase the number of adjudications. This is likely to flow from the fact that contracts no longer need to be "evidenced in writing" for there to be a statutory right to adjudicate (that is, the repeal of section 107 of the Construction Act).

This amendment may have a consequential impact on the cost of bringing an adjudication as there may be a "sub-dispute" about the terms of the contract, before the parties even begin to address the substance of the dispute. This could in turn lead to greater jurisdictional challenges.

It is interesting at this stage to consider what the current trend is in relation to construction adjudications. The Adjudication Research Centre at the Glasgow Caledonian University collects data from Adjudication Nominating Bodies and produces annual reports on the number of adjudications. Unfortunately, it is not clear if the research will continue, but the University has kindly provided the latest figures covering the period 2010 to 2011.

The graphs at Figures 1 and 2 show the number of adjudications referred to adjudication nominating bodies from May 1998 to April 2011. It is clear that since May 2008 the number of adjudications has been in decline. In fact the figures for 2010 to 2011 show that there has been a drop of 31% of referrals from the previous year alone (the previous year showed a drop of 11%).

Figure 1.

Figure 2.

Interestingly, the graph at Figure 3, which shows the number of adjudications referred to adjudication nominating bodies against the UK Construction workload, indicates that the UK construction workload is on the increase (albeit slowly) against a fall in the number of referrals to adjudication.

Figure 3.

Figure 4.

Figure 4 above shows the number of adjudicators registered with Adjudicator Nominating Bodies over time, and Figure 5 below shows discipline/profession of adjudicators registered with ANBs over time.

It is hoped that the Glasgow Caledonian University will continue its research because without it there will be no way of telling whether the prediction that adjudications will be on the increase as a result of the legislative changes is correct.

Food for thought

Is the repeal of s. 107 of the Construction Act welcome?
Is adjudication the best forum for determining a dispute that is not evidenced in writing?
Is the Statutory Slip Rule helpful?
Are the new provisions relating to the cost of adjudication realistic?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

UK: The Impact Of Legislative Amendments On Adjudication