May 1, 1998, saw one of the major changes in the construction industry over the past 20 years: the implementation of the Housing Grants, Construction and Regeneration Act 1996. As well as many other fundamental changes, the act incorporated into all construction contracts (the term includes professional contracts in the construction industry) the right to refer disputes to adjudication.
A new dispute resolution procedure, adjudication is a statutory scheme imposing on disputes a “fast track” 42-day timetable from beginning to end. Adjudication decisions have no appeal and remain “binding” until later arbitration or court proceedings. Standard construction contracts provide that later proceedings cannot be initiated until after completion of the project.
Many doubted whether legal and practical difficulties would make adjudication a genuine option for the construction industry. Two years on, and with the Royal Institute of Chartered Surveyors (RICS) having appointed more than 1,000 adjudicators to hear disputes, this article will look at how adjudication has fared, and whether it can prove a useful tool for professionals and their insurers.
There are several key issues concerning the implementation of adjudication in the construction industry.
Enforcing adjudicators awards
Given that there was no appeal from the decision, if injustice occurred on what grounds would the court not enforce a decision?
Surprisingly, although the Housing Grants Act introduced the new scheme for adjudication, which stated that the decision produced was “binding”, it produced no clear system for enforcing the awards, should a losing party not voluntarily pay. Not being judges or arbitrators, the usual enforcement mechanisms were not available to adjudicators. It was left to the courts to enforce adjudication awards.
The industry therefore had to wait and see whether the courts would enforce adjudicators' decisions in later summary judgment proceedings. These are proceedings where one party applies to the court for an early judgment of a court claim on the basis that there is no defence to the claim. The argument was that an adjudicators “binding” decision having been made, meant that there could be no further arguments.
In the first case, Macob v Morrison 1999, it was decided that the adjudicators award would be enforced by the court which would have regard to the purposes of the act when enforcing them. It was said in that case “the intention of Parliament was plain – it was to introduce a speedy mechanism for settling disputes on a provisional interim basis – crucially it is made clear that decision of adjudicators are binding and to be complied with”.
The case, heard nine months after the implementation of the Housing Grants Act 1996, opened the doors for adjudication as a valid dispute resolution. Although, if a losing party did not pay, the winning party would still have to issue court proceedings, the adjudicators award meant that the short summary judgment procedure was available and that the adjudicators award would be enforced quickly without enquiry into the underlying case.
This decision however, has also lead to further questions that need resolving. If the courts will enforce awards, without enquiry into the merits of the original decision (which is after all taken in a very short time frame), what happens if one party genuinely believes that the decision was wrong and does not wish to pay an award that he believes later arbitration will overturn? It should be pointed out that of the 20 cases that have come before the court on the question of enforcement, three have involved parties who have become insolvent, the effect being that if they were wrongly paid, it is unlikely that the money can be recouped later.
Dispute resolutions need balance, speed and cost control, but they also need justice.
The cases where, notwithstanding an adjudicators award, it is asserted that the losing party shouldn't have to pay, can be put into two categories: the adjudicators decision is patently incorrect or the adjudicator wasn't empowered to decide the issue (the lack of jurisdiction).
The incorrect decision
In Bouygues v Dahl-Jensen the adjudicator made an arithmetical error. It lead to one party being awarded £200,000 when, if the error were corrected, the other party should have been awarded £141,000. The error was obvious and acknowledged by the parties.
The winning party applied for summary judgment. You might think that the court would not enforce an obviously mistaken award, but you are wrong. The court gave summary judgment stating: “It is inherent in the scheme that injustices will occur, because from time to time, adjudicators will make mistakes”.
The effect of this case is to provide guidance that an adjudicators decision, notwithstanding if it is obviously wrong, will be upheld. Parties, when adjudicating, will have to take this into account especially if there is a risk that one party might not exist by the time the matter is in later arbitration.
The majority of cases where the parties involved have sought to defend summary proceedings, have been based on the fact that the adjudi-cator was not empowered to decide the issue. The cases are based on a variety of premises.
The contract was not governed by the Housing Grants Act 1996. Adjudication applies only to construction contracts as defined by the act. Where the adjudicator decides a dispute, and the underlying contract is not a construction contract, notwithstanding a decision was made, that decision has no validity and won't be enforced (Homer Burgess v Chirex).
The underlying contract was a construction contract, but the matter was resolved and a “contract of compromise” came into existence. In Lathom Construction v Cross it was held that adjudication could not be used to enforce a contract of compromise as it was not a construction contract as defined by the act.
The adjudicator went outside the terms of dispute referred to him. The adjudicator can give a valid decision on the dispute the parties refer to him. Small changes from the time of application and adjudication will not mean that a party has to start again.
The delicate subject of money
Somewhat surprisingly the Housing Grants Act 1996 made no provision to award legal costs in adjudication, other than the adjudicators own costs. It was therefore left to the parties to decide whether costs should be awarded, or for the court to decide whether an adjudicator had an “inherent power” to award costs.
Two entirely conflicting views have emerged. In Cothliff v Allen Build it was held that the adjudicator had the inherent power to award costs, while in Northern Developments v J&J Nichol it was held that in the absence of a power under the act, there was no right for the adjudicator to award other than his own costs. It is submitted that the second case is better authority.
Where do these cases lead us in deciding whether professional disputes would benefit from adjudication?
We are able to see the advantages and disadvantages of adjudication from the way it has been treated by the courts. On the positive side, it produces a binding and, now, enforceable decision in a short time. That short period minimises legal costs and the disruption to the underlying business of the insured. With many professional indemnity claims started as counterclaims for fees, the quick adjudication procedure might resolve some of these cases more quickly. With many professional indemnity claims involving only one or two issues, the limited timetable for adjudication might prevent such claims escalating into larger disputes than they need to.
On the other hand, the timetable will inevitably produce injustice. Unless there is a doubt about the right of the adjudicator to make a decision, it is likely that the courts will enforce an incorrect and unjust award. Later arbitration may not recoup monies mistakenly paid if the other party is insolvent.
Neutrally, legal costs cannot be awarded without specific agreement between the parties. Insurers may find that not being able to recover costs in professional indemnity claims would defer parties using adjudication. Given that the alternative is full-blown court proceedings which do award costs, this might not be a positive thing.
Only one of the cases before the courts so far has involved a professional contract. That does not necessarily mean that adjudication is unsuitable for professional indemnity disputes but may simply reflect the fact that professional disputes take longer to gestate than construction disputes and that, given the act only applies to contracts entered into after May 1, 1998, such disputes have not yet arisen.
Insurers are always looking for ways to handle disputes more efficiently. Insurers now have the advantage to look at how adjudication is being applied in construction, evaluate the strengths and weaknesses and see whether there are professional disputes in the future where costs and time could be saved by having regard to this as a mechanism for solution.