A Helpful Guide to Adjudication for Contractors

Construction

24 Jun

Introduction

This guide aims to provide contractors and subcontractors with a practical overview of adjudication to assist them in navigating the process in the event of a dispute.

What is Adjudication?

Adjudication gives the parties to a construction contract (as defined by statute) the right to have a dispute decided by an adjudicator. Its guiding principle is to recognise that cashflow is "the very lifeblood of the construction industry”. It is intended to put "broadly the right amount of money in the right pocket" quickly and cheaply pending a final determination of the dispute. Introduced by the Housing Grants Construction and Regeneration Act 1996 (“the Act”), its prominent features are:

a party can adjudicate at any time;
the adjudicator must decide the dispute within 28 days of referral to him of the dispute (extendable by the referring party i.e. claimant) to 42 days;
unless they agree when the dispute arises, neither party can recover its legal costs, whatever the outcome (though the unsuccessful party may have to pay the adjudicator's fee);
the decision has to be implemented as soon as it is made. It cannot be appealed. A dissatisfied party can try to obtain a different decision in litigation or arbitration; but it must honour the decision in the meantime. (Note that there are certain very limited circumstances, notably relating to insolvency, where an unsuccessful party may be excused immediate payment on a decision.); and
the fact that a decision is obviously wrong does not invalidate it provided the adjudicator has tried to answer the right question, has not shown bias, and has given each party a proper opportunity to present its case.

Initiating an Adjudication

There must exist construction contract as defined by the Act. Certain activities are expressly excluded such as drilling for oil or natural gas, pharmaceuticals, extraction of minerals, and manufacturing building components.
There must be a crystallised dispute: the referring party must have made a claim and the respondent must either have rejected it or, having been given a reasonable time, failed to respond.
Only one dispute can be decided in one adjudication (though a single dispute is widely construed: for example, a final account claim could include a claim for both underpayment and loss and expense).

Applicable Rules

Unless the parties have agreed the rules to be applied in an adjudication, the Scheme for Construction Contracts (England and Wales) Regulations 1998, as amended apply. The parties may, for example, incorporate their own rules into their underlying contract: but they must comply with the Act.

The Adjudication Process

Decision

The adjudicator must issue a decision within 28 days of the Referral Notice, unless the Referring Party agrees to a 14-day extension.

The adjudicator’s decision is binding and must be complied with immediately, even if a dissatisfied party intends to challenge it through arbitration or litigation later.

Pros and Cons

Adjudication offers a much swifter and (often) cheaper resolution of disputes, and a route to money, than arbitration or litigation. Although adjudicators' decisions can be reversed, they have to be honoured in the meantime, and the reality, in practice, is that most decisions are not in fact challenged. Further, each side bearing its own costs, the risks of proceeding and losing are minimised, and it becomes commercially possible to advance cases which might be too low in value to start off in litigation or arbitration.

Downsides are that there is no limit on the size of adjudication which can be brought. Therefore, costs can be quite high but are irrecoverable. Also, the limited timescale means that decisions can amount to "rough justice" and, since the referring party dictates the timing of commencement, a respondent can be ambushed with large amounts of material to process and respond to in an unrealistically short time. It has also been noted that there is a very great variety of quality of adjudicator. The reported cases show that some produce decisions which are just plain wrong; but they are nevertheless held to be valid if the correct process was followed.

The process is highly technical, and time-limits are absolute. For example, applying for an adjudicator to be nominated before serving a Notice of Adjudication invalidates the entire process. Taking professional advice is strongly recommended.

For advice on construction disputes, please contact Julian Critchlow.