Adjudication – 10 years on

To consider how adjudication has evolved over the past 10 years, it is worthwhile reminding ourselves why it was introduced and the philosophy behind it.

Statutory adjudication was introduced by the Housing Grants, Construction and Regeneration Act 1996: to ensure prompt cash flow; and to allow swift resolution of disputes by way of adjudication.

The Act is supported by secondary legislation, the Scheme for Construction Contracts (Scotland) Regulations 1998, which came into force on 1 May 1998. All construction contracts entered into after that date have to comply with the Act in respect of payment provisions and adjudication rules.

Adjudication within construction contracts is set out in s 108 of the Act. The essential points are:

• give each party the right to refer disputes arising under the contract to adjudication at any time;
• provide a timetable with the object of securing the appointment of the adjudicator and referral of the dispute to him/her within seven days of notice of intention to refer the dispute to adjudication;
• require the adjudicator to reach a decision within 28 days of referral;
• allow the adjudicator to extend the 28 day period by up to 14 days with the consent of the referring party;
• allow that extended period to be further extended with the consent of both parties;
• require the adjudicator to act impartially;
• allow the adjudicator to take the initiative in ascertaining the facts and the law;
• provide that the adjudicator’s decision is binding until the dispute is finally determined by legal proceedings, arbitration, or agreement. The parties may however agree to treat the adjudication as finally determining the dispute; and
• provide that the adjudicator is not liable for anything done or omitted to be done in the discharge or purported discharge of his/her functions as an adjudicator unless the act or omission was in bad faith; and any employee or agent of the adjudicator is similarly protected.

In the event that a contract fails to provide s 108-compliant procedures for adjudication, then by s 114 the rules set out in the Scheme will apply and take effect as implied terms. The function of the Scheme is to override the terms of a contract where it includes adjudication provisions which do not comply with the statutory requirements. This default proviso includes situations where provisions almost comply, but not entirely. In this circumstance the entire adjudication provisions within the Scheme replace the contract provisions.

Once the adjudication commences, the adjudicator is required to reach a decision on all matters referred within 28 days of the date of the referral notice, subject to extension as set out above. In doing so, the adjudicator must take account of the parties’ contract and the law. Ten years since statutory adjudication came into force, this position remains unchanged. However, the process that has evolved is more complicated than might have originally been imagined.

Mischief cured

In the early days following the Act, the building industry seized the quick fix of adjudication to bring payment disputes to a head “at any time”. This equalised the level of disadvantage that existed in the industry with respect to the “might is right” philosophy occasionally exercised by more major players.

In my opinion, making available this fast track option has greatly assisted cash flow in the industry.

This has equalised power within the construction industry, and cash flow and payment practices have improved as a consequence. The administration of contracts generally has improved, in that parties operating at all levels and of all disciplines have become more aware of the payment provision requirements.

Abuses of the provisions are now less prevalent and in my view there is now a greater level of responsibility in contracting parties to exercise obligations fairly and equitably as well as exerting rights. One of the main aims, to ease the lifeblood of cash flow through all levels of the building industry supply chain, has been achieved; however, this has not been without some hurdles along the way.

Court challenges

In most instances disputes remain focused on financial matters, which usually stem from a dispute for non-payment. It is thus not surprising that most adjudicators are quantity surveyors.

In my view, initially lawyers were generally surprised that a 28 day process could work to decide disputes, but realising that adjudication was having some impact (see Glasgow Caledonian University Adjudication Reporting Centre Report no 8), decided to take more interest in it.

There have been around 300 cases concerning adjudication in the courts. However, most of these relate to enforcement of the adjudicator’s decision rather than a hearing on the actual matter in dispute. Adjudication decisions cannot be appealed through the court system or through arbitration. They are temporarily binding until either agreed by the parties or referred afresh to a further tribunal (arbitration or court).

Enforcement cases involving a challenge to the adjudicator’s decision generally revolve around the process the adjudicator has employed and whether they had jurisdiction to decide the dispute or complied with the rules of natural justice.

Powers and procedures

Lack of jurisdiction to decide the matter in dispute has proved a fertile area for challenging an adjudicator’s decision. Examples of grounds of challenge include improper appointment; deciding a point beyond the boundaries of the dispute; or considering evidence not presented to the parties.

Whilst I appreciate that a solicitor has a duty to protect their client and may have a genuine jurisdiction challenge, many spurious challenges still come before me. These only serve to increase the time the adjudicator requires to spend and, therefore, increase the cost of the adjudication. Also, given that the initial time allowed is only 28 days, it can be interrupting and distracting to spend a significant amount of time on an unfounded jurisdiction challenge. However, in my experience this trend is changing and I now find that more genuine challenges are being raised.

Over the past 10 years, the adjudication process itself has developed. The first case to impact on procedure was Discain Project Services Ltd v Overprice Developments Ltd [2000] BLR 402, a case concerning natural justice. The adjudicator had taken a phone call from one party and did not record the full contents of the call to the other party within a reasonable time.

In my very first adjudication I went to one party’s office, interviewed them on the matter in dispute and then did likewise at the other party’s office. I then did quite a lot of serious investigation myself into the matter before getting both parties together and finally making a decision. In that case neither party was represented by a solicitor, which nowadays is also quite unusual. It would not now be acceptable to meet one party without the other party being in attendance, but initially that was considered to be acceptable.

Of importance to adjudicators is the development in case law in respect of the issuing of a decision. Initially it was acceptable for the adjudicator to advise parties by the decision date that a decision in respect of the matters referred had been reached. Thereafter, usually in accordance with the adjudicator’s terms and conditions, the decision would be issued to parties once the adjudicator’s fee had been paid. However in Ritchie Brothers (PWC) Ltd v David Philp (Commercials) Ltd (Inner House, 24 March 2005), it was held that if an adjudicator did not issue a decision, or seek and receive an extension to the decision date, within the 28 day period, any decision subsequently issued would be made without jurisdiction and would not be enforced.

Of further note is Costain Ltd v Strathclyde Builders Ltd [2003] ScotCS 316, which identified nine general principles to assist those involved in adjudication. In this case, Lord Drummond Young found that the possibility of injustice was all that was needed to give rise to a breach of natural justice.

Evolutionary process

When adjudication was introduced it was mainly to increase cash flow within the industry. Accordingly in the early days a dispute was generally related to non-payment of monies and failure to provide payment and withholding notice. As adjudication has become more popular and the industry’s confidence has grown in the procedure, more complex and difficult disputes have been referred. As the process has evolved, the need for parties to be represented has also increased and this increased the cost of adjudication. The £10,000 adjudications that we saw in the early days are now extremely uncommon.

It is now not unusual to get a detailed extension of time claim with loss and expense referred to adjudication. Disputes, which in the beginning were generally between sub-contractors and main contractors, are now often between main contractors and employers and deal with more complex issues. Matters of professional duties have also been referred.

Adjudication has been a necessary bridge in the process of dispute resolution in the building industry. Case law has nonetheless identified some issues in the current legislation that may require clarification and/or improvement, and the UK Government is currently seeking to address some of these.