Adjudication is more prevalent in the construction industry than in other commercial sectors. That’s largely because parties to a construction contract have a statutory right to refer a dispute to adjudication. Here we’ll examine the key issues around construction adjudication.
- What is adjudication?
- When is adjudication appropriate?
- When is adjudication not appropriate?
- How do you know if you have a construction contract?
- Key steps in the adjudication process
- Enforcing an adjudicator’s decision
- Challenging the enforcement of an adjudicator’s decision
- Advantages and disadvantages of adjudication
- Can enforcement of an adjudicator’s decision be deferred?
- Can adjudication be withheld?
- Adjudication vs. arbitration
- What does adjudication cost?
- How long does adjudication take?
What is adjudication?
We’ve discussed different forms of alternative dispute resolution before. Adjudication in construction contracts refers to a specific method of resolving disputes: one that recognises the distinct nature of the construction industry and the types of disagreement that can arise within it.
The automatic right to refer disputes to an adjudicator was introduced in The Construction Act, 1996. Before that there was a feeling that when a dispute over payment arose for example, many of the smaller businesses, suppliers and contractors involved in the building trade were at the mercy of larger organisations and developers with whom they had contracted. Larger businesses could better afford to go through lengthy and expensive legal proceedings than smaller contractors who could often end up failing to recover monies due to them.
Adjudication has become a common way to resolve such disputes. It’s a process that those entering contracts in the building or construction industry can’t opt out of. If there is no mention of adjudication on a contract it will be an implied term. And it’s speedy: an adjudicator is required to decide matters referred to him or her within 28 days.
One thing to remember is that adjudication is a dispute resolution method that settles matters on an interim or temporary basis. Decisions are binding – but only until the dispute is determined by litigation or by agreement further down the line.
When is adjudication appropriate?
The Construction Act allows a party to a construction contract to refer a dispute to an adjudicator ‘at any time’. Typical claims might be about:
- Non-payment of monies due for particular stages of a development
- Delays to construction
- Requests for extensions of time
- Poorly executed and defective work
- Clarification of the scope of a project
More complex contractual issues and negligence claims may also be referred to an adjudicator, even though the process was originally designed to deal with relatively straightforward claims on an urgent basis.
Very often the matter referred to adjudication is a standalone issue. A dispute might be holding up a particular building project or causing cash-flow issues for one party to the contract. By accepting the adjudicator’s jurisdiction and decision the parties can continue to work. Often the ruling will only be a temporary solution, enabling the development to continue until a more permanent outcome can be found.
When is adjudication not appropriate?
Not every disagreement is suitable for adjudication. Remember that the adjudication process in construction disputes has been developed to provide quick, practical solutions. If a dispute is particularly complex the parties may agree to court proceedings or arbitration. It is often worth seeking professional advice on the cost consequences of adjudication if you proceed. If the case is complex adjudication costs will be higher. And as we discuss below, even if you are successful you have less opportunity to recover these costs than if you go to court.
How do you know if you have a construction contract?
The right to adjudication we are examining here only applies to ‘construction contracts’ that are in writing. The Construction Act, 1996 describes a construction contract as an agreement to do any of the following:
- Carry out construction operations
- Arranging for construction operations to be done by others, for example by using a subcontractor
- Provide labour for construction operations
‘Construction operations’ is a broad term, covering everything from building, maintenance, demolition or repair of temporary or permanent buildings.
In many cases it will be obvious whether or not an agreement is a construction contract or not. If you are uncertain, it’s a good idea to seek specialist legal advice early on so that you know what the available remedies are. And it matters. In the 2014 case of Savoye and Savoye Ltd v Spicers Ltd a total of £400,000 in legal fees was incurred establishing that, what on the face of it didn’t seem to be a construction contract at all, was, and could be subject to the adjudication process.
If it turns out your agreement isn’t a construction contract you and the other contracting party can still elect to use the adjudication procedure.
Key steps in the adjudication process
The adjudication process is designed to be clear-cut and efficient. There are tight time limits to observe and conditions to satisfy before one party can start the process. The process can be extended by agreement but briefly the timeline is as follows:
|Before you begin||Check that there is a right to adjudication: does the dispute arise out of a construction contract?
Ensure the details of the claim have been brought to the other side’s attention and that the claim has been rejected or ignored. (This is known as ‘crystallisation’ of the claim.)
|Beginning the process||The party bringing the claim (the referrer) serves a Notice of Adjudication. This is followed by a Referral Notice that contains full details of the claim.|
|Within seven days||Agree an adjudicator and settle the terms and conditions of the adjudication. Any dispute over the right to refer the dispute to adjudication should be raised now.|
|Between seven and 14 days||The responding party serves a Response (effectively a defence).|
|Within seven days||Referrer replies and there is an opportunity for the responder to make further representations.|
|By day 28||Adjudicator reaches a binding decision.|
Enforcing an adjudicator’s decision
The adjudicator’s decision is binding. If one side does not comply, enforcement procedures are available through the court. The Technology and Construction Court (TCC) – an arm of the High Court – is the correct forum for enforcement actions to begin.
Cumbersome enforcement procedures would clearly undermine the whole rationale behind adjudication – to provide a speedy way to resolve construction disputes. So a bespoke procedure has been developed that aims to fast track cases of this nature.
A party seeking to enforce an adjudicator’s decision should begin proceedings under the Civil Procedure Rules. The specific procedure to adopt will depend on whether the party is seeking a monetary judgment or some kind of declaratory relief where the court makes an official declaration about the case. The claim should be accompanied by an application for summary judgment.
Challenging the enforcement of an adjudicator’s decision
Challenging an adjudicator’s decision – and its enforcement – should only be done following specialist legal advice. A successful challenge is rare. That’s because – as we have mentioned – an adjudicator’s decision is binding only until the dispute is litigated or arbitrated fully. To ensure the adjudication scheme remains effective courts will go to some length to ensure enforcement.
Case law in this area demonstrates that enforcement will be sanctioned even where the adjudicator has made a factual mistake or has applied the law incorrectly.
That said, it is possible to challenge a decision on the grounds that the adjudicator did not have jurisdiction or power to adjudicate. For example if:
- There was no written construction contract
- The dispute had not crystallised
- The correct procedures weren’t followed in appointing the adjudicator
It is also possible to argue that the adjudicator was biased in favour of one party or did not give sufficient reasons for the decision.
Advantages and disadvantages of adjudication
Adjudication is a very popular way of resolving disputes in the construction industry. But it won’t be suitable in every case. We’ve set out below some of the advantages and disadvantages of adjudication.
|Provides basis of a quick resolution to the dispute.||The scheme is geared toward getting a result quickly. Corners will on occasion be cut and crucial facts overlooked.|
|Minimises disruption to overall construction project.||A successful party won’t necessarily recover costs of the adjudication.|
|The focus on quick payment following adjudication reduces chances of contractor insolvency.||The 28-day timetable does not give the parties time to examine all the facts in cases of any complexity. Even if the right to adjudicate has arisen because a claim has crystallised it may simply be too complex to be dealt with through the adjudication process.|
|Lower costs than litigation and less exposure to irrecoverable legal fees.|
|Parties to a construction dispute will often have hugely differing financial resources. The lower cost regime and encouragement of a swift decision puts parties on a more equal footing.|
|Unlike court hearings, adjudication is a private matter between the parties.|
Can enforcement of an adjudicator’s decision be deferred?
As we have pointed out, the whole adjudication process as applied to construction contracts is aimed at finding quick solutions to disputes that might otherwise become bogged down in lengthy litigation. Delays caused by litigation can have huge knock-on consequences for the rest of a building project and parties uninvolved in the dispute. So it would make little sense if enforcement of a decision by an adjudicator could be delayed for any length of time. In one of the most important cases in this area, Wimbledon v Vago (2005) the court confirmed this. It reiterated that stays in execution of adjudication decisions are contrary to the principles of the Construction Act, 1996. They should be allowed only in limited situations, for example if the contractor against whom an order to pay money was made is insolvent.
In 2018 the principles set out in Wimbledon v Vago were extended to suggest that a stay of execution may be permitted where there are grounds of suspected fraud. That is to say where the party seeking a delay in executing the adjudicator’s decision produces credible evidence that the party that succeeded in the adjudication may attempt to dissipate any monies received from the unsuccessful party so that they are unable to be repaid in the event that the adjudicator’s decision is overturned by later litigation or arbitration.
Can adjudication be withheld?
Parties to a construction contract can’t opt out of adjudication. And if there is no reference to the process in the contract, the provisions of the Scheme for Construction Contracts, 1998 will be implied. A party that receives a Notice of Adjudication may of course challenge the adjudication process by arguing for example that the:
- Contract in question is not a construction contract
- Dispute that forms the basis of the notice has not yet crystallised so adjudication is premature
- Adjudicator has not been appointed properly
- Dispute has already been adjudicated
Adjudication vs. arbitration
Arbitration is another form of resolving disputes often used in construction disputes. Parties appoint an arbitrator who makes an award that’s binding on the parties. Adjudication and arbitration have much in common (they are both private, flexible alternatives to court for example). But there are significant differences and each process has pros and cons. We’ve set out a summary of these below.
- Length of proceedings
As we have seen adjudication is fast – a process that takes 28 days from start to finish (longer if agreed between the parties). Arbitration on the other hand has a much more judicial feel about it and can take months or years to run its course.
- Consideration of issues
Because of the compressed timescale adjudication may not fully examine all the issues. For particularly complex disputes involving several parties arbitration allows for a fuller examination of the issues.
- Legal fees
Because it’s quicker and usually involves a standalone issue of dispute, adjudication costs can be much lower than the costs of arbitration. Arbitration is a more formal process with each side presenting a case, disclosing different categories of evidence and going through several procedural steps. One advantage of arbitration is the possibility of recovering legal costs from the other side. This is not available in adjudication where each side usually bears its own costs.
An arbitrator has a wider range of legal remedies at his or her disposal than an adjudicator. Adjudication usually results in a monetary award or a remedy dictating timescales within which a contractual element must be performed.
What does adjudication cost?
Adjudication is a short process so exposure to costs is limited. But because each party usually pays its own legal fees, the cost of adjudication can be a significant consideration. It’s difficult to be precise about actual costs, as each case will depend on its particular facts. But expenditure to bear in mind includes:
- Adjudicator’s fee – Adjudicators charge an hourly rate, usually of between £200 and £300 plus VAT. Critically, a responding party may well have little say over the appointment of an adjudicator or the level of fees because the referral notice is issued before the responding party knows what fees the adjudicator is seeking. In addition each party will be jointly liable for the fees of the adjudicator so if one side doesn’t pay the adjudicator can claim all his or her fees from the other.
- Fee to professional body that nominates the adjudicator.
- Fees to your professional advisor – Payment to a specialist construction lawyer to advise you throughout the process. It is unlikely that you will be able to recover these fees even if you are successful in the adjudication.
How long does adjudication take?
The adjudication procedure follows a timetable of 28 days. This can be extended to 42 days or longer by agreement between the parties.