ADR - Law Firms UK Construction ADR - Adjudication

Monday, August 1, 2005 - 01:00

The UK and U.S. construction industry, with its typically high value or complex disputes and the need for urgent resolution of those disputes, has led the way in developing and implementing new forms of ADR. This tradition continues.

May 1998 heralded the arrival of an untested form of ADR exclusive to the UK construction industry - Adjudication. Several years on, the majority of construction and engineering disputes are resolved through Adjudication, a process that is growing in worldwide popularity. Is it the UK's turn to export to the U.S. its comparatively new and increasingly highly regarded alternative form of ADR?

For those involved with construction projects in the UK and the disputes that invariably arise, Adjudication is available as a contractual (or, by default statutory) right. Experience and knowledge of the procedures, and resultant tactics and strategies to be deployed, is a distinct advantage.

Background

Both in the UK and the U.S. litigation and arbitration have for some time been regarded as being unsuitable for the resolution of construction disputes where 'time is money' and there is a need for quick resolution of disputes, especially for sub-contractors and construction specialists where cash flow is paramount and profit margins often tight. A UK government sponsored review of the needs and requirements of the UK construction industry led to the adoption of Adjudication on 1 May 1998 as part of the Housing Grants, Construction and Regeneration Act 1996 ("the Act").

Adjudication - Provisions Of The Act

Relevant contracts

The Act applies to all commercial construction operations, to include not just contracts for works but also design, surveying and architectural services in relation to construction operations. Whilst parties to a contract may always agree as a term of contract to resolve disputes by Adjudication, the Act excludes from the definition of construction operations:



  • works to residential homes



  • drilling/extraction for oil and gas



  • mining or tunnelling works, and



  • assembly, demolition or installation of plant and machinery.

All UK standard form construction contracts contain Adjudication provisions.

The need for a written contract

For the Act to apply, the contract governing the construction operation in question must be in writing, whether by formal contract, exchange of letters or otherwise evidenced in writing, for example, minutes of a meeting. Recent court judgements, given in deciding whether decisions of Adjudicators should be enforced, make clear that it is not sufficient for only certain of the agreed contract terms, for example those relied upon in pursuing a dispute through Adjudication, to be in writing. Rather, all agreed contract terms should be recorded in writing, although this does not of itself disallow contracts that include terms of contract implied in a particular contract by reason of statute or industry practice.

To illustrate, Adjudicators cannot consider disputes concerning alleged additional or varied works instructed orally and not in writing, notwithstanding that all other contract terms are in writing.

The need for a dispute

The Act provides an absolute right for a 'dispute' to be referred to Adjudication at 'any time.' This right exists, regardless of what the contract between the parties says, and allows an Adjudication to be commenced during contract works or after those works have been completed or following termination of a contract.

There has been much judicial debate about what constitutes a dispute; should it be found that no dispute has crystallised, there is then no right to refer the underlying issues to Adjudication. The courts have ruled that:



  • A dispute is said to have arisen when a claim is made and rejected in clear language. A refusal to consider or answer that claim is a rejection of a claim.



  • It must be clear that a point has been reached at which it can be said that negotiations have come to an end and that there is an issue to be resolved.



  • Seven days is not enough time for allowing response to a claim before a dispute can be said to have arisen but three to four weeks is.

Tight Timescales

A typical Adjudication procedure is as follows:



  • A Notice of Adjudication is issued by "the Claimant," giving notice of the dispute and requiring the appointment of an Adjudicator, assuming the preferred Adjudicator is not, as is possible, named in the contract. Adjudicators currently have to be impartial but not necessarily independent of the parties to the Adjudication. The trend is against naming Adjudicators within the Contract at the outset of the project, primarily because of their possible:


Unavailability as and when a dispute arises, and

Lack of professional expertise or experience relevant to the particular type of dispute.

  • If agreement cannot be reached, the Claimant immediately asks a nominating body (usually referred to in the Contract) to appoint an Adjudicator, who will typically be an architect, engineer, quantity surveyor or specialist construction lawyer.



  • Within seven days of service of the Notice of Adjudication, the Adjudicator must be appointed and the Claimant must also serve a Referral Notice, setting out the detailed substance of its claim and attaching all documentation relied upon. The right to advance new arguments or material not previously disclosed or relied upon by the Claimant is very limited. If these strict time limits are not complied with, the initial Adjudication notice is rendered invalid and must be re-served.



  • Any Defence must be served by "the Respondent" within seven days of receipt of the Referral Notice. Unlike the Claimant, the Respondent is entitled to rely upon any argument or material in support of its defence, irrespective of whether the same has been relied upon before commencement of the Adjudication.



  • The Adjudicator decides the remaining procedure to be followed in the Adjudication. The Adjudicator can request either a site visit and/or a hearing at which both parties present their case and provide any further information that the Adjudicator requires. Many Adjudications have no hearing and are decided on the basis of written submissions.



  • The Adjudicator must publish his decision, with reasons if requested, not later than 28 days after the Referral Notice, unless the Claimant agrees to any request by the Adjudicator for an extension of time to that timetable. These requests are often made and always agreed to.



  • The parties are jointly and severally liable for the fees and expenses of the Adjudicator. The Adjudicator usually specifies in his decision which party is to pay his fees dependent upon the outcome. Fees can be allocated to be paid by both parties on any percentage split if the Adjudicator decides the Claimant has been only partially successful in pursuit of its claims.



  • The parties to the Adjudication bear their own costs, irrespective of the outcome. The rationale behind this rule, currently being reviewed (and which is contrary to usual practice in courts in England and Wales that the losing party should pay the winner's costs), is that smaller sub-contractors should not be dissuaded from pursuing recovery of contract monies wrongly withheld by main contractors simply through fear of exposure to risk of paying for substantial costs incurred in the defence of that claim.

Binding Nature Of The Adjudicators' Decision

The Adjudicator's decision is binding unless and until the dispute is finally determined by court or arbitration proceedings (depending upon the contract terms) or by agreement. It is possible to have the same issues decided by the Adjudicator referred to the court or arbitration for final determination, but only after the initial Adjudicator's decision has been honoured, for example, with monies awarded paid in full.

If an Adjudicator's decision is not honoured, it can be enforced by the Claimant issuing court proceedings that are fast tracked through to a hearing at which the Claimant seeks summary judgement for the sum awarded by the Adjudicator, plus accrued interest and costs. The courts will enforce Adjudicator's decisions even if those decisions are shown to be wrong in fact or law. There are few decisions that are successfully challenged, with the Respondent in essence having to establish either:



  • That the Adjudicator did not have jurisdiction to reach the decision (for example, by ruling on an "issue" not in dispute, or because of no dispute or contract not in writing). For lack of jurisdiction arguments to succeed at court enforcement proceedings, they must have been raised during the Adjudication itself and/or



  • That the Adjudicator was in breach of the principles of natural justice, to include bias towards one or other of the parties, and which breach or bias was relevant to the decision made, and/or



  • That the Claimant is in liquidation and there exists a potential set-off, and/or



  • That the Claimant is impecunious, in which case the Court has a discretion to exercise in deciding whether to enforce the Adjudicator's decision.

One Size Fits All?

One criticism of Adjudication and a further area of challenge to Adjudicator decisions has ironically been that the process is ill suited or too quick for some categories of large (both in terms of quantum claimed and documentary evidence) or complex disputes, for example professional negligence claims typically requiring expert report and analysis. It is typically argued:



  • That the Respondent in such situations is 'ambushed,' with no fair opportunity to prepare and present his case (with only seven days from receipt of the Referral Notice to serve a Defence), and/or



  • That the Adjudicator, in having a minimum 21 days only from receipt of the Defence, does not have sufficient time or expertise to investigate the facts and law and prepare a properly considered decision.

As there is nothing in the Act limiting Adjudications to certain types or size of claim, the courts have been asked to consider whether, in such large or complex cases, the process is fair and by continuing the Adjudication, Adjudicators thereby commit breaches of natural justice.

By way of illustration, in a recent case, the court was asked to consider whether the case was too complex for Adjudication. The claim was for £12m ($22m) and amounted to 52 files of documentation. The Adjudication process allowed for six experts' meetings and resulted in a 139 page decision. Throughout the process the Adjudicator asked for and was granted by both parties extensions of time for his decision. The process nevertheless only lasted 21/2 months from start to finish.

The judge found that the relevant question was not whether the dispute was too complicated to refer to Adjudication but whether the Adjudicator was able to reach a fair decision within the time allowed by the parties. In this case he found that 21/2 months was sufficient time and so granted judgement as requested by the Claimant.

Conclusion

The process of Adjudication presents both threats and opportunities, depending upon parties' readiness and commercial awareness of procedures and strategies and tactics that can and perhaps ought to be deployed in any given situation. More often than not, Adjudication on certain discreet issues can be deployed as part of ongoing negotiation between the parties in a wider context.

For U.S. businesses who operate in the UK construction market, whether as procurer of building works or as contractor or design team consultant, there is a huge advantage in understanding those threats and opportunities and so helping to maximise returns and ensure as successful a project as possible, and avoiding long running and costly litigation or arbitration.

Formulating a comprehensive contract strategy, the clear documentation of all contract terms, understanding when and how to proceed with Adjudication claims, and how the defence of those claims should be conducted to include laying the necessary groundwork for, if appropriate, subsequently resisting enforcement of decisions, should together give the best hope of success in the UK construction market and of minimising risks of and exposure to damaging and expensive disputes.

David Rintoul is a Partner in the London office of Clarkslegal LLP. Clarkslegal LLP is also a member of TAGLaw, a worldwide legal network of independent law firms. The TAGLaw network has 134 firms in 80 countries and 120 jurisdictions. Visit the website of Clarkslegal LLP at www.clarkslegal.com.

Please email the author at drintoul@clarkslegal.com with questions about this article.