Mixed blessings
Is adjudication a burden or boon for local authorities? asks Kevin Barrett
The Housing Grants, Construction and Regeneration Act 1996 revolutionised dispute resolution in the construction industry. At a stroke it swept away the delay associated with litigation and arbitration by providing a new procedure under which a legally binding and enforceable decision on building disputes could be made in under 35 days from the commencement of the procedure. A boon indeed. But it comes with burdens.
Mischief
The mischief of the legislation was that developers were not paying contractors, who were not paying their sub-contractors, and so on down the food chain. Litigation and arbitration were seen as slow and expensive - leaving cash starved builders at the mercy of both their debtors and their creditors. Something had to be done to speed up the flow of cash that is the lifeblood of the construction industry. That something was adjudication as provided for in the act. This new procedure is mandatory for all qualifying contracts. It enables either party to refer a dispute to an impartial third party, an adjudicator, within 7 days of giving notice of intention to do so. Once referred the adjudicator is then required to make a decision on the dispute within 28 days of referral, unless this time period is extended in accordance with the statutory procedure.
Once made the decision of an adjudicator under the act is binding upon the parties until the dispute is finally determined by a court, or an arbitrator (where appropriate), or by agreement (see Section 108 of the act). This temporary finality was reinforced by the courts which decided that the decision of an adjudicator must be enforced unless a lack of jurisdiction or a breach of the rules of natural justice in conducting the adjudication can be shown (see Carillion Construction Ltd v. Devonport Royal Dockyard Ltd (2005)). One consequence of these limited grounds of challenge is that a decision that is plainly and obviously wrong will nevertheless be enforced provided the adjudicator answered the right question, even if the answer is wrong (see Bouygues (UK) Ltd v. Dahl-Jensen (UK) Ltd [2001] BLR 522 (CA)). Another consequence is that is that alleged natural justice breaches must be serious and will be approached with scepticism (see, for example, Pegram Shopfitters Ltd v. Tally Weijl (UK) Ltd [2004] BLR 65 (CA)).
Enforcement
Enforcement of these temporarily binding decisions is generally by way of an application for summary judgment in the High Court. Oftentimes the court will abridge the normal time limits for acknowledging service of the proceedings and for making an application for summary judgment (see Outwing v. Randall [1999] BLR 156 (TCC)). This means that it is not unusual for a summary judgment application to be heard within a fortnight of commencement of proceedings. In the absence of a jurisdictional or natural justice defence then judgment will follow and, although the court retains and may exercise its power to stay execution of the judgment in special circumstances these have been narrowly and tightly confined with the result that there is a residual risk that if the decision is ultimately shown to be wrong it may not be possible to recover money paid pursuant to the decision (see, for example, Wimbledon Construction Co 2000 Ltd v. Vago [2005] BLR 374 (TCC)).
Payment of a decision is not necessarily the end of the building dispute. If either party is dissatisfied with the decision they are free to commence proceedings (either in court or by way of arbitration if the latter is stipulated in the contract as the final dispute resolution procedure) to finally resolve the dispute. The relevant tribunal then hears the dispute de novo (not by way of an appeal) and makes an award accordingly. The effect may be that money paid over pursuant to a decision by an adjudicator may ultimately have to be paid back.
Impact on local authorities
At the developer level the real targets of complaints about non-payment (and therefore of the legislation) were commercial entities. So if the mischief of the legislation was that commercial players in the construction industry were not paying each other where does this leave local authorities and should they care?
The answer to the first part of this question is that local authorities are subject to the legislation whenever they enter into a qualifying contract with a builder or professional consultant. Currently these qualifying contracts must be in writing, but this will change when the amendments to the act introduced by the Local Democracy, Economic Development and Construction Act 2009 come into force. Statutory adjudication under the act applies to every “construction contract” as defined in section 104: being an agreement for the arranging, the carrying out, or the provision of labour for “construction operations” (as defined in section 105 of the act) which includes agreements to do architectural, design or surveying work and for advising on building, engineering, decoration or landscaping.
The definition of construction operations is all encompassing but is nevertheless subject to a number of express exclusions also set out in section 105 (which rarely relate to the kind of work that local authorities habitually procure). In addition, there is a list of excluded contracts that includes PFI contracts (see Construction Contracts (England and Wales) Exclusion Order 1998). So where this leaves local authorities is that much of the building work that they habitually procure is subject to the statutory adjudication regime and its 'pay now, sue later' philosophy except where the local authority is a developer under a PFI contract.
Should local authorities care?
Whether local authorities should care that they are subject to the statutory adjudication regime is a much more difficult question to answer. The careful lawyer might venture a hesitant 'it depends'. The speedy resolution of disputes is a laudable objective. But it has to be balanced against other considerations. The first consideration is 'surprise' or, as some prefer: 'ambush'. This prospect arises as the act permits the commencement of an adjudication 'at any time' and the courts have refused to fetter this right (see, for example, Mayor & Burgesses of Camden LBC v. Makers UK Ltd [2009] EWHC 605 (TCC)). A claimant can therefore prepare at leisure and then spring an ambush on an unsuspecting respondent.
The courts have, however, imposed one safeguard to mitigate the ambush potential; which is the requirement that there must be a crystallised dispute between the parties at the time the notice to refer the dispute to adjudication is given. Subject to this safeguard a respondent may be rapidly caught up in a fast paced process where a response to a 'referral notice' (effectively the statement of case, evidence and submissions of the claimant) must be served within 7 days of receiving the referral. The response itself usually takes a similar form, so assembling this document can sometimes be a mammoth task. Even when it is complete it may then be necessary to be ready to respond rapidly to further information provided by the other party or to requests for information made by the adjudicator. A project or legal team unfamiliar with the procedure and the intricacies of building contracts may find the process a genuine burden.
The danger in these circumstances is that the response may not be adequately prepared despite the best efforts of those involved and the respondent may be consequently disadvantaged. The only real strategy for overcoming the stress and risks of an ambush is to be alert to manoeuvres that show an intention to crystallise a dispute. Once such manoeuvres are noted it is necessary to make a tactical decision as to how to deal with the risk of an adjudication. The options are: wait and see, or begin preparations for an adjudication response? It can be a difficult call because not every intimation of a dispute will necessarily result in an adjudication - and in these cash strapped times resources need to be used wisely and sparingly. Nevertheless, in appropriate cases it may be sensible to seek advice so that an informed decision can be made as to whether to stand and fight or retreat, and if the former as to what if any defensive steps might be taken.
Another consideration concerns resources and cost. A claimant may spend months preparing a claim before commencing an adjudication, while the urgency produced by the adjudication timetable often calls for all hands to the pump in the first seven days after receipt of the referral. This can be an enormous drain on resources for the project team and for their legal advisers as they seek rapidly to understand their opponent's case, assemble evidence in rebuttal (if the claim is to be contested) and draft their own submissions in response - which may include jurisdictional objections. This process, especially where it comes as a surprise, diverts manpower from normal planned activities. Also, departmental resource budgets may be strained as a result, all the more so if it is necessary to engage external advisors to assist at significant extra and unplanned cost. There are plenty of examples of parties having expended as much on a 28 day adjudication as they might have expended had the action been conducted over 18 months in the High Court. The effect of an adjudication on a departmental budget can therefore be significant.
Matters are compounded, in some respects, by the fact that under the act an adjudicator may not award costs unless expressly empowered by the parties to do so. When the 2009 Act comes into force there will be restrictions on the power to authorise the adjudicator to award costs (to stamp out a particular abuse that arose under the act - see Bridgeway Construction Ltd v. Tolent Construction Ltd (11/4/2000) (Unreported)) with the effect that the circumstances where this power is exercised are likely to be rare. The adjudicator can, however, allocate his own fees on a proportionate basis as between the parties (albeit such allocation is without prejudice to the joint and several liability of the parties for those fees). This approach to costs means that there is generally no prospect of recovering from the other party the cost incurred if that party is unsuccessful and a risk that the successful party may have to fund the adjudicator's fees in full if the other party becomes insolvent. The cost of fighting an adjudication can therefore be burdensome. However, the absence of a costs power can be a boon if the outcome is unfavourable.
Fight or flight?
Not all adjudications are frighteningly expensive, nor are ambushes the order of the day. Indeed, adjudication has great advantages and when used sensibly achieves the objective of being swift and it can be economical. Often, whether an adjudication is a boon or a burden depends on the outcome. A sensible (if not entirely satisfactory) decision made in quick order at modest cost is in everyone's interests. But a bad decision made after a protracted period at high cost is in no one's interests. While the parties cannot dictate the decision they do have a significant control over the process in terms of how long it takes and the resources to be deployed. Getting the right resources into place at the right time is therefore crucial. Managing the process from the moment a potential dispute is identified is therefore the ideal approach and the key to success. Get it right and even an unfavourable decision may nevertheless ultimately be a boon. Get it wrong and it will prove a burden.
Kevin Barrett LLB, FCI Arb, barrister is a tenant at No5 Chambers specialising in dispute resolution in relation to building disputes. He is the author of 'Defective Construction Work' published in 2008 by Wiley-Blackwell.
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