Adjudication

Adjudication is a form of ADR where a dispute is resolved by means of an appointed Adjudicator reviewing evidence and arguments set out between opposing parties with the intention of reaching a decision that determines the rights and obligations, and a remedy between the parties involved.

There are typically three types of dispute that are resolved through Adjudication, these being:

1. Disputes between private parties, such as individuals or companies

2. Disputes between private parties and public officials.

3. Disputes between public officials or public bodies.

We will look specifically at Adjudication and its operation in the United Kingdom Construction industry.

Construction Adjudication became a form of ADR in the UK with the passing of the Housings Grants, Construction and Regeneration Act 1996 (HGCR) and in particular Chapter 53 of the Act and this was subsequently amended with the passing of Local Democracy, Economic Development and Construction Act 2011 (LDEDC), under which Part 8 amended the 1996 act. These amendments sought to do the following:

• Increase clarity in construction contracts;

• Introduce a fairer payment regime, and improve rights for contractors to suspend their work in non-payment circumstances;

• Encourage the use of adjudication for the resolution of disputes.

These amendments came into force on 1st October 2011 in England & Wales and 1st November 2011 in Scotland.

The Scheme for Construction Contracts England & Wales Regulations – “The Scheme”

In England and Wales, “The Scheme” supplements the LDEDC and provided fall-back provisions where a contract does not include the eight Adjudication provisions that are specified in the LDEDC Act and these provisions therefore apply as “Implied Terms.”

In Scotland, The Scheme for Construction Contracts (Scotland) Regulations apply, which have a similar effect.

In effect Adjudication provisions of the Scheme will apply if:

• a construction contract’s adjudication procedure does not comply with the Construction Act, even in just one respect;

• the necessary adjudication provisions are not contained in the contract;

• the parties have an oral or partly oral contract and the necessary adjudication provisions are not in writing.

Perhaps the most significant change with the passing of the LDEDC Act is the abolition of the requirement for construction contracts to be in writing. The LDEDC Act will apply to all construction contracts, be they wholly in writing, partly in writing or wholly oral.

Under the previous legal framework Adjudication was subject to jurisdictional challenges making Adjudication more difficult. The changes under LDEDC are intended to prevent this, but the effectiveness of this will only be established in the courts at some stage.

However it must be borne in mind that some provisions, such as the slip rule, costs and Adjudication must still be in writing and if not then “The Scheme” will apply.

The Slip Rule

Under the previous legal framework, an adjudicator’s decision is binding on the parties until finally decided by court action or arbitration, or by a subsequent to the Adjudicators Determination, an agreement between the parties. The courts have made it clear that this meant that the Adjudicator’s Determination would be enforced, even if the Adjudicator has made an error in reaching it.

In the 2000 decision by Judge Toulmins [Bloor Construction (United Kingdom) Ltd v Bowmer & Kirkland (London Ltd [2000] B.L.R. 764], an exception has been accepted where there is:

• a clear or obvious errors (‘slips’)

• errors which have been corrected within a very short time following the publication of the Determination

In a number of standards forms of contract, the Adjudicator is given the power to correct these slips.

Under LDEDC, construction contracts will have to include a provision, in writing, which allows the adjudicator to correct errors of:

• a clerical or typographical nature
• that have arisen by way of an accident or omission on the adjudicator’s part.

If the contract does not comply with these requirements then the relevant provision will be implied into the contract under “The Scheme.”

The contract may stipulate the timeframe under which the the Adjudicator can exercise this power, however if no period is chosen by the parties a five day period will be provided for under “The Scheme.” In effect this has the implication that any errors which need correction must be identified as soon as practicable after the decision is published.

The costs of Adjudication

It is accepted that in most circumstances Adjudication is a less expensive procedure that legal action in court. However the parties still have to pay the Adjudicator’s fee’s and while these can be estimated prior to commencement of the Adjudication they are not known or fixed. Additionally each party will have to bear their own costs in preparation costs and costs during the 28 day Adjudication process.

The HGCR did not deal with the issue of costs, effectively leaving the parties to make representation through the Adjudication process to the Adjudicator as to who should bear the costs, particularly of the Adjudicators fee’s.

In 2000 a company called Bridgeway Construction Limited commenced and were successful in an Adjudication against Tolent Construction Limited, however a term in their contract stipulated that the party serving the notice to adjudicate would bear the costs of both parties. The court held that the clause was a legitimate form of developing the procedure in relation to costs [Bridgeway Construction Ltd v Tolent Construction Ltd [2000] CILL 1662; [2000] WL 1027055] this despite the clear unfairness of the approach. This became known as the “Tolent Clause.”

The “Tolent Clause” raised two major issues in relation to the cost of Adjudication where a clause in the contract dealt with costs, these being:

• there is no incentive for a party to keep its costs to a reasonable level if it knows the other side will be liable for them;

• a deserving party may end up out of pocket because it will have to pay its costs and the other side’s costs even if it wins, which could negate the amount it is awarded by the Adjudicator in his Determination.

Under the new legal framework enshrined in LDEDC, any contractual provision in relation to Adjudication costs will be unenforceable and ineffective unless they are made in writing and

• it is contained within the contract and confers a power on the Adjudicator to allocate his fees and expenses; or

• it is made after the adjudication process begins.

The primary purpose of this amendment within LDEDC was to prohibit contractual provisions that did not comply with the amendment.

The intention was to prohibit any contractual provisions which do not comply with the new rule. This was reflected in a 2010 case [Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC)] where it was held that a Tolent clause conflicted with the Act and would therefore be replaced with the provisions in “The Scheme.”

Adjudication clauses in a Construction Contract

As previously stated the LDEDC abolishes the requirement for construction contracts to be in writing and further this Act will apply to all construction contracts.

The primary aim of this change is to prevent the unintended consequence of HGCR where jurisdictional challenges were brought by parties relying on previous law.

The new amendment will likely have an impact in the following two instances:

• Where a contract has not been fully executed and is subject to a “Letter of Intent”

• Standard forms of contract, supplemented by oral agreements

It is therefore imperative that the Letter of Intent contains a clause that mirrors the Adjudication clause that will be agreed and included in the executed contract, even if a contract is ultimately not formed between the parties.

Where standard forms of contract are agreed to avoid verbal agreements being implied the contract should have an “Entire Agreement” clause whereby it is clear that the formal agreement between the parties is limited to the contents of the contract documents. Further any agreements that have been agreed verbally between the parties as part of the forming of the contract should be captured in writing as an Appendix.

This is particularly important with the new legal framework under LDEDC as previously a party could not commence an Adjudication, unless the contract was in writing and contained a provision for Adjudication, whereas now it will be possible.

The consequence of this change is that where there are ambiguities’ as a result of a “Letter of Intent” or Standard forms supplemented with oral agreements, hearings are likely to take place for the Adjudicators to determine the composition of the contract and this could result in more time being required by the Adjudicator so that they can decide these issues, which will increase his fees and expenses.

Therefore the main changes to the Adjudication process under the LDEDC Act are:

• the amended Act will apply to construction contracts whether made in writing or made orally, meaning it will critical to ensure that contracts are executed properly and removing the scope to argue about verbal agreements

• Adjudication may become more complicated due to the need to identify and assess the impact of any agreed oral terms;

Next time we will look at the process of an Adjudication.

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