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Adjudication at the Crossroads:

The Construction Act - One Size Fits All?

By Mark A Atherton
Director: Knowles Ltd

The much heralded Construction Contracts Bill (as part of the Local Democracy,
Economic Development and Construction Bill) has now finally been passed by
Parliament, and (subject to the ruling of the government of the day) is likely to come
into force next year. This article assesses the main changes to the legislation, and
questions whether the reforms meet current industry needs, and will assist in
providing an efficient and just dispute resolution system within the UK.

Cash flow and the resolution of disputes by quick, cost effective means, has never
been more important to the survival of a contractor than today. It is now over 11
years since the Housing Grants Construction and Regeneration Act was enacted
providing the statutory right to adjudication under construction contracts, with the
objective of providing a temporary, cost efficient and quick means of resolving
disputes, until the matter was finally determined by arbitration or the courts. As
eloquently stated by Dyson J in the seminal case of Macob1:

the intention of Parliament in enacting the Act was plain. It was to introduce a
speedy mechanism for settling disputes in construction contracts on a provisional
interim basis.. The timetable for adjudications is very tight. many would say
unreasonably tight, and likely to result in injustice. Parliament must be taken to be
aware of this .But Parliament has not abolished arbitration and litigation of
construction disputes. It has merely introduced an intervening provisional stage in
the dispute resolution process

1
Macob Civil Engineering Ltd-v- Morrison Construction Ltd [1999] 64 ConLR1

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Fuelled by the advantages of speed and relatively lower costs in resolving disputes,
adjudication has become the primary method for resolving construction disputes in
the UK over the last 11 years2, largely supplanting arbitration and ensuring litigation
is only used as a last resort.

The success of adjudication is evidenced by the fact that it seems to be regarded in


some quarters as the panacea for all disputes with recent court decisions and the
proposed Construction Act intent on widening its scope and application. In addition,
far from providing an interim decision, adjudicators decisions have provided a
greater permanency than first envisaged by Parliament. Whilst this may be viewed as
a positive endorsement of the process, the challenge facing adjudication now and in
the future, is to provide quality and cost effective decisions for the parties in
increasingly complex disputes.

In Cantillon-v- Urvasco Ltd3 Akenhead J made it abundantly clear that the


adjudicator and both parties are not restricted to arguments raised prior to the
adjudication and have a wide latitude when prosecuting or defending the essential
claim in an adjudication by putting forward new information or raising new arguments
the anything goes/ or black bag approach to arguments and evidence. Whilst the
reasoning of such an approach is laudable, (i.e. to enable all arguments to be raised
and a practical robust approach to be taken in resolving the dispute) the side effect
of this ruling could potentially be to extend timescales and increase the costs of the
adjudication.

One of the issues a Referring party has to consider when considering commencing
an adjudication, is the non recovery of costs in pursuing his claim irrespective of the
result. The commercial reality is that bona fide claims of less than 15,000 are often
unviable for a potential claimant to pursue in adjudication, due to the costs that are
likely to be incurred. This fact therefore encourages unprincipled employers and main
contractors to withhold the final 10,000 due; safe in the knowledge that there will be
no commercial incentive to pursue any sums outstanding in an adjudication with
the only alternative available to a claimant being the more lengthy and costly option
of litigation.

2
Glasgow Caledonian Adjudication Reporting Centre research analysis based on ANBs
returned questionnaires.
3
Cantillon Ltd v- Urvasco Ltd [2008] EWHC 282 TCC

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The non-recovery of costs by parties in more complex adjudications also presents a
different problem, due to the level of costs often incurred.

As recently commented on by Coulson J4 in an adjudication that was brought for


enforcement in 2009:

In other words considerably more has been spent on costs and fees than could have
been recovered in relation to the claim itself, ..
...It seems to me that this was just the situation, (where the costs outweigh the value
of the claim itself), which led to the general enthusiasm for adjudication in the first
place. I fear that in disputes of this kind, the adjudication process is in danger of
revisiting some of the inefficiencies and injustices of the past.

The non-recovery of parties costs, is therefore a barrier to the use of adjudication and
as a consequence one of the original objectives of the HGCRA (1996) and the
introduction of adjudication; namely to assist the cash flow of Sub-Contractors and
Contractors alike,5 is at risk of being defeated.

Rather than seek to address this fundamental issue of cost recovery by the
successful party, the concern is that the proposed reforms contained in the
Construction Act will inadvertently add fuel to the fire, with increased jurisdictional
challenges and disputes arising from the new legislation.

The main thrust of the Construction Act reforms are to:-

i) Outlaw any pre-agreements for the allocation of fees further to Bridgeway


Construction Ltd v- Tolent Construction ltd [2000]6.

ii) Expand the application of adjudication to oral contracts, following the decision in
RJT Consulting Engineers ltd v- DM Engineering (Northern Ireland) Ltd [2002]7 .

iii) Redraft the payment and notice provisions

4
Primus Build Ltd v- Pompey Centre Ltd (& Slidesilver ltd) [2009] EWHC 1487 (TCC)
5
Latham Report 1996: Constructing The Team:HMSO
6
Bridgeway Construction Ltd-v- Tolent Construction Ltd [2000] CILL 1662-1664
7
RJT Consulting Engineers Ltd-v- DM Engineering (Northern Ireland) Ltd [2002]EWCA Civ
270:2002; [2002] 1 WLR 2344

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Considering these amendments in turn:

Firstly, the intention to outlaw Tolent clauses (whereby the referring party bears the
costs of the adjudication irrespective of the outcome) is commendable. However the
new legislation applies a blanket ban on all pre-adjudication agreements allocating
the parties costs.

Unfortunately the new legislation fails to consider the benefits of a party being able to
recover their costs of the adjudication, thus making the system more accessible for
contractors and sub-contractors alike. The inclusion of a right within the statute for
either party (if successful) to recover their costs (capped at say 10,000) would
greatly assist in curtailing the common abuse of the last 10,000 being withheld on
the account and ensuring one of the key objectives of adjudication; namely to assist
cash flow to contractors (particularly small sub-contractors), preserved.

Secondly, although the RJT decision significantly limited a partys right to adjudicate
where no written contract agreement existed, the reason why RJT was decided as it
was, was not because the court wished to unduly restrict a partys right to adjudicate,
rather Lord Justice Ward foresaw the difficulty in requiring adjudicators to make
decisions based on alleged oral contracts within very limited timescales stating:-

Certainty is all the more important when adjudication is envisaged to take place
under a demanding timetable. The adjudicator has to start with some certainty as to
what the terms of the contract are

The danger of allowing oral contracts to be decided by adjudicators, it is submitted,


are:-

i) The risk of injustice will increase (as an adjudicator will potentially have to
decide on who said what - with limited evidence and in a very limited time
scale, and with often no formal training)

ii) An increase in challenges to the adjudicators jurisdiction.

Indeed the proposed reform is analogous to councils deciding that fluoride levels in
water need to be increased because the populous dont clean their teeth properly.
Surely the remedy must be prevention rather than cure, i.e. to educate, and ensure

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that people do clean their teeth, or in the case of the construction industry that parties
commit their contracts to writing, to enable them to exercise their right to adjudicate.

Finally, although elements of the current payment and notices regime are ignored by
the industry (particularly the Payment Notice under S110) most contractors and
employers are now familiar with the system. Only time will tell whether the new
payment provisions will materially assist payment in the industry, and as raised by
the City of London Law Society8 there is a danger that virgin construction employers
could fall foul of the new notices regime. Under the new provisions if an employer
fails to issue the required payment notices he could be required to pay the contractor
the amount applied for in an interim valuation, or payee notice (which could be
significantly overstated) rather than the amount correctly due to the contractor.

In short, whilst there are elements of the proposed reforms that will improve the
adjudication process (such as outlawing of Tolent clauses), the act fails to address
the fundamental challenges facing adjudication, specifically in relation to suitability of
the process for the dispute and the recovery of costs.

The government and industry needs some joined up thinking about how we structure
our dispute resolution system in the UK and to decide what they want from
adjudication. Is it the replacement for arbitration, or is it the binding, but temporary
procedure envisaged to assist a contractors cash flow, forming part of a multi-tiered
dispute resolution system complementing other forms of dispute resolution (including
mediation and arbitration)? If it is the former, then cost recovery by the successful
party, must be a central part of the adjudication process. If it is the latter, the
Government should not be seeking to expand the role and application of
adjudication, but providing a working alternative, which will complement it.

Adjudication has been a tremendously successful process over the last 11 years,
facilitating quick resolution of construction disputes and revolutionising the dispute
resolution process in the UK, however as one tier within the dispute resolution
system, it should continue to provide a quick and relatively straightforward option to
resolve disputes, with (it is submitted) the right of the successful party to recover the
costs expended in the adjudication capped at 10,000. For more complex disputes

8
Response by the City of London law Society: Construction Law Committee Sept 2008.

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(which include contracts not wholly in writing), arbitration (or ultimately litigation)
would provide a more comprehensive and appropriate method of dispute resolution.

The challenge facing Arbitration is that although the Arbitration Act 1996, is an
enlightened and commendable piece of legislation, it is not prescriptive enough and
as a consequence the process is uncertain and therefore unattractive to disputants.
In order to provide a platform from which arbitration can operate within the UK it is
therefore proposed that a statutory right to arbitrate (akin to adjudication), should be
enacted by Parliament. The 100 days Arbitration Scheme as promulgated by the
Society of Construction Arbitrators, provides a more balanced and potentially
sophisticated process to complement the rough and ready justice of adjudication,
whilst at the same time providing a process that is capped in duration and to an
extent cost.

Parties could therefore choose which statutory right they wish to exercise to suit the
dispute in question and whether to opt for a quick and rough form of justice with the
objective on obtaining cash flow (via adjudication) or a more comprehensive and final
determination of the dispute (via arbitration). In either event, recovery of a partys
costs where a valid claim is demonstrated should be an inherent right within the
process and equally would discourage manufactured or inflated claims.

Dispute resolution is increasingly an investment decision for a business, with a party


requiring a clear understanding of costs against the potential returns. The process
therefore needs to be tailored to meet the needs of the industry, and a clearly defined
statutory process for both adjudication and arbitration, with recovery of costs for the
successful party would provide a more efficient and fairer system.

The concern is the Construction Act as drafted will encourage a one size fits all
approach, where adjudication is shoehorned into all nature of disputes with no pre-
determined mechanism for recovery of a partys costs, and therefore (contrary to its
intention) dilute the benefits of adjudication and increase injustice.

Mark Atherton
Bsc(Hons),Dip Arb, Dip Law, MRICS, FCIArb, HKIAC Accredited Mediator
January 2010