Construction briefing: Rough justice, smoother delivery

In 1973, the English Court of Appeal described the cash flow of a construction company as the “very life blood of the enterprise”. Some 50 years later, concerns over cash flow are exacerbated by COVID-19, never mind the impending impact of Brexit. Luckily, there is a way of ensuring that cash can flow quickly.

The adjudication provisions within the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”) significantly enhanced the rights of payees. Those provisions were introduced in response to the final report of Sir Michael Latham, Constructing the Team. Sir Michael highlighted the access to justice issue presented when contractors faced lengthy delays recovering payment through the courts. His recommendation that adjudication became “the normal method of dispute resolution in construction” has since been taken up by the industry.

How does adjudication work?

In summary, the Construction Act provides that:

• Any party to a “construction contract” (defined in s 104, with exclusions in ss 105 and 106) must have the right to refer a dispute to adjudication at any time (the pursuer is the “referring party” and the defender the “respondent”).
• The dispute must be determined by the adjudicator within 28 days, unless an extension to the timescale is agreed.
• The adjudicator’s decision is “interim binding” on the parties. This means that the decision must be complied with, unless the dispute is determined afresh through the courts or arbitration.

Importantly, if the construction contract does not contain these provisions (for example, if the contract is not in writing), a set of default statutory rules under the “Scheme for Construction Contracts” will take effect.

The key advantages of adjudication are: (i) the reduced cost and increased speed of recovering payment (when compared to court or arbitration); and (ii) the ability to select an adjudicator with qualifications relevant to the dispute. Whilst adjudication is often said to deliver “rough justice”, that concern is balanced against its advantages and the fact that the decision is interim binding only. As put by the Supreme Court, “The motto which has come to summarise the recommended approach is ‘pay now, argue later’.”

The problems

In more recent years, the advantages of reduced cost and increased speed have been eroded:

• Cost. The types of disputes have become more complex, and the procedure more sophisticated as a result. In addition, adjudicators are wary of their decisions being undermined by challenges raised at the outset, based on jurisdiction, for example the absence of a “dispute” or the referring party’s failure to appoint the adjudicator in line with the contractual procedure, and/or natural justice – in general, some sort of procedural unfairness. Perhaps a symptom of both of these factors, there is a tendency for some adjudicators to allow multiple rounds of submissions rather than exercise strict control over the timetable. This substantially increases the parties’ legal costs (which, importantly, neither can recover from the other side).
• Speed. The successful referring party may not be cashing its cheque immediately. The respondent can refuse to comply with the decision, based on a challenge raised at the outset, or a shortcoming in the written decision. This has led to a practice of respondents scrabbling around for grounds to resist enforcement, and therefore delay while an enforcement action is determined through the courts.

If a payee can no longer afford to adjudicate (let alone litigate or arbitrate), the access to justice issue highlighted by Sir Michael again rears its head. Two recent developments are welcome in addressing that issue. The first is the release of new services for determining “low value” claims, and the second is the Inner House’s recent support for a pragmatic approach to the enforcement of adjudicators’ decisions.

Cost: low value dispute services

The Technology & Construction Solicitors’ Association (TeCSA) established its Low Value Dispute Adjudication Service permanently in January this year. More recently, the Construction Industry Council launched its Low Value Dispute Model Adjudication Procedure (the LVD MAP), which is now available from a range of adjudicator nominating bodies. Some key features of the schemes are considered:

• Adoption of procedure. The TeCSA service can be used under existing contracts simply by asking TeCSA to appoint an adjudicator (unless the contract names an adjudicator or restricts the adjudicator nominating bodies that may be approached). By comparison, the LVD MAP constitutes a new set of procedural rules that must be incorporated into new contracts or otherwise used with consent.
• Value threshold. Under TeCSA’s service, a low value dispute is anything up to £100,000. This compares to the £50,000 threshold under the LVD MAP. Both are sensible, given the Adjudication Society’s 2019 statistics that: (i) 38% of disputes had a value from £0 to £50,000; and (ii) 19% had a value between £50,000 and £100,000.
• Fee cap. Adjudicators’ fees are capped according to a sliding scale based on the value of the claim (beginning at £2,000 and rising to £5,000 (TeSCA) and £6,000 (LVD MAP)). These caps will undoubtedly deliver a saving, in light of the Adjudication Society’s finding that the average adjudicator’s fee was £9,000. There is, however, a trade-off for reduced cost: the dispute must be relatively straightforward to determine.
• Complexity. Under the TeSCA service, the claim must be for a specific sum of money (e.g. a claim for liquidated damages, or the so-called “smash and grab” adjudication based on sums previously certified). Disputes under the LVD MAP are not limited to claims for specific sums of money; however a list of factors is given to determine whether the dispute is suitable or not. These are more restrictive, being dependent both on the substance of the claim and the volume of material to consider.

One of the drawbacks with the LVD MAP is the prospect that the adjudicator could resign if, midway through, a dispute became too complex or document-heavy. This could lead to attempts by the respondent to frustrate the process. Separately, neither service can be used for low value but nonetheless complex claims. The solution in such cases is for adjudicators to be more proactive in regulating the procedure and timetable in an adjudication. In doing so, adjudicators will be walking a tightrope in view of potential jurisdictional and natural justice challenges, although most should be able to strike the correct balance. Further, adjudicators may take some reassurance from the recent Inner House judgment in Dickie & Moore v McLeish’s Trs [2020] CSIH 38.

Speed: approach to enforcement of decisions

While a firm line has always been taken on enforcement, in recent years the Scottish courts have refused to enforce the decisions of adjudicators who failed to address a material line of defence or provide adequate reasons in relation to some aspect of the dispute. The problem was that, in such cases, the decision became a house of cards. It was generally viewed as a total nullity and could not simply be enforced to the extent it was valid.

In Dickie & Moore the Inner House considered this problem. The case concerned an adjudicator’s decision on a contractor’s claim for payment of its final account. There were three types of subclaim. There was no dispute that the adjudicator had jurisdiction to deal with claims 2 and 3, but the Lord Ordinary held that he had no jurisdiction to deal with claim 1. The question became whether the court could ignore the decision on claim 1 and safely enforce the decision on claims 2 and 3 (in other words, apply severance of the good from the bad).

The Inner House clarified that severance is allowed, so long as the valid parts of the decision are not “significantly tainted by the adjudicator’s reasoning in relation to the invalid parts”. In effect, removal of one card should not always lead to a total collapse.

This principle can be more easily applied to “final account” claims, which usually consist of different types of subclaim, although it is not restricted in scope. A “practical and flexible” approach will be applied to determine whether, in any case, there are elements to the dispute that are clearly separate and untainted. Where the test is met, it will no longer make economic sense for a respondent to resist enforcement of a decision when the adjudicator’s failure affects a lower value element.

This decision was grounded in the policy aims of adjudication, the Inner House noting: “the provisions of the scheme should be interpreted in such a way that they achieve its fundamental purpose, which is to enable contractors and subcontractors to obtain payment of sums to which they have been found entitled without undue delay”. Looking beyond the issue of severance, this emphasis on the underlying principles will serve as a warning to respondents considering other types of challenge to enforcement.

Advising clients

In light of the advantages of adjudication, solicitors should consider how they might advise their clients:

• Litigators. The Law Society of Scotland expects solicitors to “have a sufficient understanding of commonly available alternative dispute resolution options to allow proper consideration and communication of options to a client in considering the client’s interests and objectives” (guidance to rule B1.9). While a lengthy sheriff court or Court of Session action would achieve finality, would a quicker adjudication better suit the client’s objectives?
• Drafters. Drafters should consider incorporating the LVD MAP into new construction contracts. Where the activities would not be caught by the Construction Act, a bespoke adjudication procedure could be considered (for example in the case of construction of a residence, which is excluded from the Act, by using the scheme available under the JCT Building Contract for a Homeowner/Occupier).

The increased access to adjudication, through the developments discussed above, may now tip the balance when deciding between dispute resolution options.