Adjudication in construction contracts
This is an article introducing the concept of Adjudication in construction contracts.
We have a more detailed article on construction adjudication here.
We also have an affordable online course in construction adjudication if you want to get a good introduction to Construction Adjudication and how to run your own Adjudication as the referring party or responding party.
Introduction
What is a Adjudication in construction contracts ?
Adjudication in construction contracts is an alternative dispute resolution procedure introduced to encourage the completion of construction projects while disputes are being agreed.
The Adjudicator is a third party who provides the service of reviewing all of the arguments in a dispute an issuing a decision that both parties must abide by in the interim.
The Adjudicator is nominated by a registered body and must be impartial.
What is the history of Adjudication in construction contracts ?
Adjudication was introduced as a statutory right in an attempt to solve clear cashflow issues in the Construction Industry. Basically rogue Clients and Main contractors were simply not paying in accordance with the contract leading to the subcontractors leaving site or going out of business. Disputes were referred to arbitration or the courts process and main contractors and subcontractors would simply abandon the work until the issues were resolved.
The construction industry needed a process whereby issues that cropped up (inevitably) in construction could be dealt with quickly so that payments could be made, cash flows maintained and works progressed.
Advantages of Adjudication in construction contracts
Fast
Adjudication must follow a strict timetable of a decision being issued within 28days of the dispute being referred to Adjudication. This is not a lot of time and therefore means the process must be very efficient by design. While an Adjudicator can act as an ‘investigator’ they usually reply on written submissions from both parties. This eliminates time destroying meetings, group call, long oral arguments, cross examination of witnesses and everything we associate with the courts process. All such written submissions are encouraged to be brief and to the point — the Adjudicator cannot be expected to review 10 boxes of documentation for a simple dispute.
This is much faster than other forms of dispute resolution such as Mediation, Arbitration and the Courts Process.
Affordable
There is no need for either party to hire a legal representative such as a solicitor as the process is generally quite simple to follow. As mentioned above the process takes less than 28 days so there is limited time to spend on the process. So the process is more affordable than Mediation, Arbitration and the Courts Process.
Allows construction project to continue
The Adjudicators decision is an interim decision. This means that the dispute has been resolved for now. Both parties must abide by the decision in the interim but either party can refer the dispute to Arbitration or the Courts Process. This means that a dispute can be resolved (if only temporarily) during the construction process allowing both parties to complete the works. This is the whole point of Adjudication – to stop disputes holding up the completion of construction projects.
Enforceable
The Adjudicators decision must be abided by. For example an Adjudicator issues a decision that states the losing party owes the other party £100,000 payable within five days. The losing party must pay this amount or it will be subjected to a court order leading to a possible winding up of the business.
Expert judgement
Once a dispute is referred to Adjudication both parties have the opportunity to select the characteristics of the Adjudicator they require. So, for example, if the dispute is all about an issue with the program, the parties can select an Adjudicator with a project management background. If the issue is regards a construction costs issue then naturally an Adjudicator with a construction cost consultant background is preferable. It means that the dispute is decided by someone who has a lot of experience in the matter.
Disadvantages of Adjudication in construction contracts
The Adjudicators decision is only interim, not final
The Adjudicators decision is an interim decision allowing for the quick resolution of a dispute in the interim allowing the construction project to continue. Both parties can agree that the Adjudicators decision is final but either party can refer the dispute to Arbitration or courts process. Its important to note however that both parties must abide by the decision in the interim. If the losing party has to pay money then they must pay that money. Otherwise the winning party can quickly obtain a court order for payment.
Can be seen as rough justice, pay now decide later
It is quite possible for one party to enforce a particular contractual clause such as payment on a technicality even it is not on balance a fair or just result. For example, a main contractor can forget to issue a negative payless notice against a payment of £200,000 from a subcontractor. Contractually speaking the main contractor must pay up. The fair amount might only be £120,000 but it doesn’t matter if they didn’t follow the contract. The Adjudicator can enforce payment and the main contractor will have to issue a payless notice on the next payment or go to Arbitration or the courts process to settle the final payment.
It can be argued that in this case, the main contractor should have just followed the contract. The whole point of Adjudication legislation is to make construction a fairer playground for Clients, Main contractors and subcontractors.
The Construction Act
The right to Adjudication can be claimed due to a statutory right or a contractually created right.
The statutory right arises due to the legislation that introduced the Adjudication for Construction contracts. This legislation is referred to as the Construction Act but its full name is The Housing Grants, Construction and Regeneration Act 1996.
The Construction Act after some bedding in time was supplemented by the The Scheme for Construction Contracts (England and Wales) Regulations 1998.
Between these two pieces of legislation most construction contracts excluding where the Client is a residential houseowner can enjoy access to Adjudication for dispute resolution.
Section 108 of the Act
The Adjudication process in Construction contracts must follow the process laid out in Section 108 of Part II of the The Housing Grants, Construction and Regeneration Act 1996.
Section 108 introduces the requirements that a construction contract needs to be meet before Adjudication can be used. If the contract does not meet these requirements then the statutory scheme will apply instead.
This means that any party to a construction contract will be able to refer a dispute to Adjudication using either the contractor or the statutory scheme instead.
Section 108 (2) of the Act
This section lays out the process by which an Adjudication should follow including:
- Referring party must give notice of their intention to refer a dispute to adjudication
- The Adjudicator must be appointed within 7 days of the referring party giving such notice
- Within 28 days of of the referral notice the Adjudicator must issue the decision
- The Adjudicator must act impartially and without bias
- This section gives the Adjudicator the power to make their own decision
- The Adjudicators decision is binding on both parties
- The act states that the Adjudicator is not liable for anything they do during the process unless they have acted in bad faith
The Scheme for Construction Contracts (England and Wales) Regulations 1998
So, if a construction contract does not reach the requirements of Section 108 of the Act then The Scheme for Construction Contracts (England and Wales) Regulations 1998 applies instead.
Say for example a construction contract does not even mention Adjudication the scheme applies.
Or perhaps the contract mentions Adjudication but states it will take place over six weeks instead of 28 days then the scheme can overrule the contract and apply instead.
For Adjudication to apply because of the construction act the contract clauses must be in alignment with the act otherwise the scheme applies.
Either way there is no practical difference from the lay persons point of view.
2011 amendments to the Housing Grants, Construction and Regeneration Act
Further amendments to the original Construction Act were issued in 2011 to close any loop-holes that were discovered since the introduction of the act in 1996 and the scheme in 1998.
How is an Adjudicator appointed ?
The Adjudicator will be either expressly named in the contract or a nominating body will be named in the contract. Then, when a dispute is referred to Adjudication the dispute will be referred to that Adjudicator or the nominating body will appoint the Adjudicator.
Can one party object to the appointment of a certain Adjudicator?
Yes, they certainly can but unless there is a valid reason why the Adjudicator should not be appointed (e.g. bias, clear prejudice) then no party can veto the appointment.
Powers of the Adjudicator
The Adjudicator can request relevant information that they require and carry out their own investigations. They can issue a binding decision which must be complied with. The Adjudicator can direct that a parties legal costs can be paid by the other party unless this is expressly prohibited in the contract. The Adjudicator can order payments by one party to another including application of interest.
Related Articles
Useful Links
- NEC contract.
- NEC adjudicators.
- Association of Independent Construction Adjudicators.
- PACE Guide to the Appointment of Consultants and Contractors P383
- Technology and Construction Solicitors Association (TeSCA)
- Construction Industry Council (CIC) User’s guide to Adjudication