Proposed Reforms to Adjudication Procedure - 5 December 2008

05/12/2008

By Chris Whittington, Partner and Head of Construction & Engineering and Chris Kirby-Turner, Solicitor in Construction & Engineering.

The Draft 'New' Construction Act

On 5 December 2008, a further draft of the Local Democracy, Economic Development & Construction Bill was published. The Bill contains, amongst other matters, the latest proposals for the reform of the adjudication provisions contained in the Housing Grants, Construction & Regeneration Act 1996 (more frequently referred to as “the Construction Act”).

The ambit and ambition of the proposed reforms in relation to adjudication procedures is clear. The Construction Act introduced the construction industry to the adjudication process, which has since served the industry well in providing a relatively quick and cost-effective resolution to disputes. Since that time, considerable effort and imagination has been invested by parties in developing legal arguments to derail the adjudication procedure, leading to the courts having to develop a number of principles in response.

One area in particular that has grown as a common preliminary matter is whether the adjudicator has the jurisdiction to deal with the matter. This is particularly so in relation to the often vexed question of whether a contract fulfils the requirements of the Act (namely, that it is a construction contract in writing). Similarly, the question may often arise as to whether a residential occupier was made fully aware of the incorporation and effect of an adjudication provision (particularly where a standard form of contract is used).

These inventive legal arguments have grown to an extent where they are regarded by some as hindering the principal objectives of adjudication: namely, to deal with a dispute in a timely and cost-proportionate manner so as to maintain cash-flow in the construction industry. Given the current economic climate and the very real consequences that even a seemingly minor delay in payment may have on a contractor, these objectives have come into sharp focus as the reforms are contemplated.

Application of statutory adjudication to both written and oral contracts

One of the key reforms in the draft Bill is that oral contracts will be included within the scope of the adjudication provisions. Currently, only construction contracts that are wholly in writing are subject to statutory adjudication. The proposals would extend its application not only to contracts which are partly written and partly oral, but also to contracts which are wholly oral.

Currently, the courts require that all non-trivial terms of the contract must be in writing. This has had the effect of a large number of adjudications being barred (for example, where it is apparent that a written contract is either incomplete or has been subsequently varied by verbal agreement. An example of the latter case, where a party argued (unsuccessfully) that verbal variations had had the effect of making the contract no longer wholly in writing and so outside the scope of the Act, was the very recent case of Linnett v Halliwells [2009]).

The Court of Appeal, in RJT Consulting Engineers v DM Engineering (Northern Ireland) [2002], noted that the rationale for this strict requirement is that the contract must be sufficiently certain, if the adjudicator is to be expected to reach his decision within the very short time limits of an adjudication.

Were the proposed change to take effect, the impracticality of dealing with contradictory witness evidence as to the precise oral terms agreed is readily understandable, given the limited time available and infrequency of opportunity for the adjudicator to hear oral submissions and evidence.

To deal with contradictory evidence as to oral terms, an adjudicator may well feel that a hearing is necessary. This is a somewhat alien concept to the deliberately very informal nature of adjudication proceedings. If this necessity becomes commonplace, then arguably there will be considerable practical difficulties which are not addressed by the draft Bill. An adjudicator has no power to administer the oath for witnesses giving evidence and there are no formal rules dealing with the admissibility of evidence. Furthermore, the draft Bill contains no provision whereby the adjudicator may unilaterally extend the time he requires to reach his decision (which may be essential, if he has to prepare for, conduct and properly consider evidence that is adduced by way of a hearing).

There could be some considerable scope in appropriate cases where the terms of an oral contract are disputed to argue as to whether an oral contract existed at all. If the only evidence is that a series of negotiations took place, and no “meeting of the minds” occurred (or cannot be demonstrated) then, as a matter of contract law, there is no contract. Instead, the dispute would be subject to a quantum meruit assessment (to determine a “reasonable value” for the works actually undertaken). In such cases, the matter would still fall outside the widened scope of statutory adjudication.

A Responding Party may find attractions in running such an argument so as to avoid the often draconian consequences of having to set out its position within the rapid timetable of an adjudication. If such a tactic becomes commonplace, there is a risk that many Responding Parties could score something of an “own goal”.

Whilst the Responding Party may well feel that there is improved scope to negotiate settlement once adjudication has been ruled out, in the event that the matter proceeds through the courts, quantum meruit disputes are notoriously time consuming and expensive to litigate. If one starts from the position of there being no contract, an expert will have to undertake a comprehensive “bottom up” valuation of the works as carried out, as there would be no contractual basis on which to value the works by reference to interim or final valuations, variations and the like. As such, the benefits of escaping the adjudication would need to be very carefully balanced against the risk of becoming embroiled in difficult, prolonged and expensive litigation.

Agreements as to the costs of the adjudication

By default, the parties to an adjudication bear their own costs (albeit they will usually be jointly and severally liable for the adjudicator's fees).

There have, however, been an increasing number of instances where Employers have sought to discourage Contractors from referring disputes to adjudication by including an express term that the Referring Party is to bear all of the costs and expenses of the adjudication, including the Responding Party's and adjudicator's costs. Such a situation arose in the case of Brideway Construction Ltd v Tolent Construction Ltd [2000].

The draft Bill contains a proposal whereby the only agreements that would be valid in relation to the allocation of the costs of an adjudication would be those made in writing after the Notice of Intention to Refer has been issued. This mirrors the provisions of Section 60 of the Arbitration Act and removes the risk that the common use of disincentives in the construction contract would unfairly hinder a contractor from using the adjudication procedure.

Missed opportunities for reform?

Quite apart from the merits and potential consequences of the changes set out in the draft Bill, it is arguable that a good opportunity to address other deficient areas has been missed.

As set out above, the adjudicator still has no unilateral right to extend the time scale within which he must reach his Decision. If the adjudicator fails to reach his decision within the 28 day period, the case law is not altogether clear as to the position as to whether a certain tolerance is allowed for communication of the decision (as was the case in Barnes & Elliot v Taylor Woodrow Holdings Ltd [2004]) or whether the adjudicator's jurisdiction expires on the 28th day (as per Ritchie Brothers (PWC) Ltd v David Philip (Commercials) Ltd [2005]).

Other fundamental matters of timing remain unclear, not least the consequences of a failure to serve the Referral Notice within 7 days of the Notice of Intention to Refer. Whereas in Cubitt Building & Interiors Ltd v Fleetgarde Ltd [2006] it was held that there could be some margin to allow late service of the Referral Notice, in Hart Investments v Fidler [2007] the court held that a Referral Notice served late fell foul of the Act and the Scheme and was therefore invalid. In the very recent case of Linnett v Halliwells [2009], it was held that where the Referral Notice was served late on the Adjudicator but reached the Responding Party on time, this was not an effective ground on which to challenge the adjudicator's jurisdiction.

The position also remains unclear in relation to two fundamental questions: in what circumstances and to what extent may set-off may be applied to an adjudicator's award (or the circumstances within which Liquidated Damages may be withheld against the award). In a matter where the scope of a Referral is insufficiently wide to allow the Responding Party to introduce matters which it may be forced to bring by way of a cross-adjudication or other proceedings, these questions are clearly fundamental. The proposed amendments to the Construction Act would seem markedly deficient in failing to clarify this area.

Similarly, the draft Bill does not take the opportunity to set out a codified mechanism to govern the enforcement procedure of an award. Putting the procedure on a clear statutory footing could significantly improve the certainty and therefore cost-effectiveness and timeliness of giving effect to the adjudicator's Decision.

Summary

Measured against its original objectives, the adjudication procedure has been successful in meeting many of the objectives that underpinned the philosophy behind the Construction Act.

It is almost inevitable that the “devil in the detail” has resulted in considerable emphasis being placed on “loop-holes” in practice. Whilst the intention to widen the types of construction contracts to which the adjudication provisions can apply is understandable, the proposals in the draft Bill do raise concerns that the unintended by-product could be, in effect, to supplant one series of loop-holes with another.

The draft Bill could also usefully deal with other matters, in particular to improve certainty as to the right of set off against, and enforcement of, awards.

The draft Bill still has a number of stages to go through before it becomes enacted and it is likely that the concerns of interested bodies will make the current draft anything but a final version.

If the draft Bill develops to include these improvements, this could justify the seemingly inevitable price of the reforms creating new areas of uncertainty, which will doubtless be as creatively explored as the current grey areas. What must be avoided is merely supplanting one source of inventive wrangling with another without any net benefit to the overall certainty and clarity of the procedure.

This information sheet has been prepared to highlight some of the key issues arising in relation to adjudication procedure from the latest proposals for reform to the Construction Act. The proposals are far from finalised and will be subject to review (and are likely to be the topic of a further information sheet in due course). It is based upon our understanding of the legal position as at February 2009.