Arbitration v Adjudication in construction contracts

This Article is all about Arbitration v Adjudication in construction contracts

Stravelles run a course in Adjudication which aims to  allow the student to run their own adjudication as the referring or responding party without paying for legal representation.

We support legal representation in more complex cases but we want to encourage especially smaller companies to feel more confident fighting for their contractual rights.

Introduction

In construction contracts, disputes tend to happen regularly. They are not that big of a deal and can be resolved easily provided there is a willingness to engage on both sides.

There are many forms of dispute resolution methods including negotiation, mediation, conciliation, Arbitration, Adjudication and Litigation.

Negotiation, mediation and conciliation are all non binding, free or low cost methods of dispute resolution. On the other side of the spectrum Litigation can be lengthy and expensive.

In this article we are going to compare Adjudication and Arbitration as these are the two formal forms of dispute resolution (excluding litigation) in construction which produce binding decisions.

So which form of alternative dispute resolution is better?

What is Adjudication in construction contracts   ?

Adjudication is a formal form of dispute resolution whereby a dispute is referred to an independent third party who decides the issue within 28 days. It is a statutory right to all parties in a construction contract established by

The Housing Grants, Construction and Regeneration Act 1996 and supported by the The Scheme for Construction Contracts (England and Wales) Regulations 1998.

Adjudications are generally based on paperwork submissions and there is rarely in person meetings, phone-calls etc. The emphasis is on speed and ensuring fair payments throughout a construction project to maintain workable cashflows.

What is Arbitration in construction contracts ?

Arbitration, like Adjudication is a formal form of dispute resolution whereby a dispute is referred to an independent third party, the Arbitrator or Arbitration panel who decides the issue and issues an award.

There is no right to Arbitration and therefore it must be included in the contract for it to be capable of being implemented. Also, there is no statutory time limit to an Arbitration process. Unlike Adjudication an Arbitration

The Arbitration Act 1996 outlines the general procedure that must be followed.

It is fair to say that Arbitration is generally falling out of favour compared to its quicker cousin, Adjudication.

Which is faster Arbitration v Adjudication in construction contracts    ?

Adjudication is faster at it sets out by law a maximum 28 days from the date of referral of a dispute to Adjudication the date of the Adjudicators decision.

Arbitration has no such time limit and an Arbitrator or Arbitration panel could take several months to issue an award.

So if you want a dispute solved fast then you should use Adjudication. For example, a sub-contractor refers a payment dispute over £200k not paid by the main contractor.

The subcontractor wants payment immediately so they can keep their cashflow sated and continue with the works.

Arbitration is simply not suitable and Adjudication is the quickest way to get paid.

Which is cheaper ?

Adjudication is cheaper because it is by design, quicker. A quicker process means less chargeable hours by the Adjudicator and legal representatives hired by the referring party or responding party.

In Arbitration the costs are essentially open ended and depend on how long the Arbitration process will take.

Arbitration also generally involves  the hiring of a venue where parties can be cross examined in person whereas adjudication is generally paperwork based.

In Adjudication, legal costs are generally paid by both parties, e.g. everyone pays their own legal fees.

Which is fairer ?

Both systems can be fair.

Adjudication can be seen as ‘rough justice’ or ‘pay now argue later’ because it concentrates on issuing an interim binding decision within 28 days to preserve both parties cashflow and relationship. It can ride  roughshod over technical niceties to get to the base camp of fair justice regarding payments.

Arbitration focuses on deciding the issued based on current legislation and past precedent and do not focus so much on time.

So Arbitration can be more thorough because it really mimics the court process of discovery and interrogation.

Adjudication is binding in the interim but the decision can be challenged or reviewed in Arbitration or the courts system. What is fairer than that ? Arbitration generally results in a binding award that cannot be challenged.

Which is less time consuming for both parties ?

Adjudication requires submission of documentation from the referring and responding party expressing their point of view so it does take time.

However, Adjudication does not require meetings, phone calls, cross examination of witnesses whereas Arbitration generally involves a lot of in person time.

So Adjudication is the least time consuming between Arbitration and Adjudication.

Which is easier to understand for non legal people ?

Arbitration is essential the courts process but in private hands.  The courts process is highly technical and difficult for non legal persons to penetrate. So if you are deciding to use Arbitration you are essentially handing over the dispute the legal professionals and letting them go to bat for you.

Adjudication, on the other hand, is much easier to understand. The referring party (the plaintiff) refers the dispute to Adjudication. The referring party issues their side of the argument which is called the referral document. The responding party (the defendant) issues their side, the response. Then the Adjudicator goes away, reviews the information and makes a decision.

So, you cannot get more simpler than that. If the referring party is sufficiently competent with expressing their side of the argument then they can lead and participate fully in the process without hiring a legal professional.

So we believe Adjudication is easier to understand than Arbitration.

What method should you go for ?

If you have a dispute in construction you should start off trying to solve it using negotiation. Negotiation is free and generally lets you agree something mutually acceptable with the other party preserving the relationship. Mediation and conciliation are extensions of negotiation but cost money and time.

Arbitration gets both parties a ‘day in court’ and they can have their dispute investigated thoroughly and a detailed decision made.

Adjudication gets a decision made with 28 days, there is less time required of both parties and does not require legal professionals.

It must be noted that Adjudication came after Arbitration and was improved with the issue of the scheme. If Arbitration was sufficiently useful for construction projects then Adjudication would never have been required. The introduction of Adjudication proves that Arbitration was not seen as working very well in construction. And of course how could it? How can Arbitration which is set up to mimic the slow and lumbering court system be any use to a subcontractor who requires payment within five weeks or they will go out of the business?

What form of dispute resolution you use to solve a dispute will depend on what is in your contract.

If its says Arbitration you need to use Arbitration. However you can always refer a dispute to Adjudication as you have the statutory right to do so in most contracts.

If it says use Adjudication then you have not right to use Arbitration and can only do so with the agreement of the other party.

Arbitration is still well regarded as a process to solve very complicated disputes that require investigation and cross examination of witnesses while Adjudication is seen as being the most useful for common, simply disputes especially regarding payment.