Category: Alternative Dispute Resolution

Enforcement of Adjudication decisions

Adjudication, as a form of Alternative Dispute Resolution (ADR) is a faster form of resolving a dispute between parties to a contract. However there is a golden rule when Adjudicating on the same dispute.

The current position is quite straightforward.

If a dispute referred to Adjudicator is the same or substantially the same as a previous Adjudication, an Adjudicator cannot decide on this second dispute. He will not have jurisdiction.

In a recent Court of Appeal case this was put to the test.

In Brown v Complete Buildings Solutions Ltd [2016],  the judge was required to rule on whether an Adjudicator had jurisdiction to decide on a dispute referred to him. As the matter of the dispute had been argued in a previous Adjudication, it was argued that the Adjudicator did not have jurisdiction.

Timeline of events

A Joint Contract Tribunal (JCT) Minor Works Building Contract (2011) was entered into between the parties to demolish a residential house in Ashtead, Surrey and build a new house. The Contract Sum was £496,578.

The Architect certified Practical Completion on 9th April 2013 and then issued a Certificate of Making Good Defects on 25th October 2013. On 31st October the Architect issued a Final Certificate for the sum of £115,450.50. This sum remained unpaid and on 20th December 2013 the Contractor sent a letter to the Employer stating this Final Payment of £115,450.50 was due.

The sum remained unpaid and a Notice of Adjudication (the First Adjudication Notice) was issued on 7th February 2014 in accordance with Clause 7.2 of the Contract.

Mr. C Calcroft was named as the Adjudicator by the Adjudication Nominating Body (ANB). In this Adjudication is was accepted that the Architect’s Final Certificate was in breach of contract as it was not issued in accordance with Clause 4.8.1 of the Contract, but rather relied on clause 4.8.4 which provided:

If the final certificate is not issued in accordance with clause 4.8.1,

4.8.4.1  the Contractor may give a payment notice to the Employer with a copy to the Architect/Contract Administrator stating what the Contractor considers to be the amount of the final payment due to him under this Contract and the basis on which the sum has been calculated and, subject to any notice under clause 4.8.4.3, the final payment shall be the final amount.

 4.8.1.3 If the Employer intends to pay less than the sum specified in the Contractor’s payment notice, he shall not later than 5 days before the final date for payment give the Contractor notice of that intention in accordance with 4.8.3 and the payment to be made on or before the final date for payment shall not be less than the amount stated as due in the Employer’s notice.

Further Clause 4.8.5 of the Contract established that where the Employer did not give a counter notice under clause 4.8.4.3 it was obliged to pay the Contractor the sum stated as due in the Contractor’s notice.

The Adjudicator, Mr. Calcroft issued his Decision on 1st April 2014 where he concluded that the Final Certificate (CBSL) issued on 30th October was ineffective and further found that CBSL’s letter of 20th December 2013 was not a valid Payment Notice in accordance with Clause 4.8.4.1 of the Contract on the following two grounds:

  1. It was based on the ‘Final Certificate’ being issued late, whereas it was in fact invalid
  2. The terms of the 20 December 2013 letter did not comply with clause 4.8.4.1 in view of the way it was expressed as it did not make clear that it was:
  • a notice
  • Issued pursuant to clause 4.8.4.1

The Adjudicator ruled that since no Payment Notice had been served, no sum was payable.

On the same day as Mr. Calcroft issued his Decision, 1st April 2014, CBSL sent a letter which was detailed as a “‘notice pursuant to Clause 4.8.4.1 of the Contract.” This was followed on 24 April 2014 with a further Notice of Adjudication (the Second Adjudication Notice).

The ANB appointed Mr. C Hough as Adjudicator on 29th April 2014. Brown disputed Mr. Hough’s jurisdiction on the basis that he was being asked to decide the same, or substantially the same, dispute as had been decided by Mr. Calcroft in the First Adjudication. They therefore declined to participate in the Adjudication and further did not serve a notice under Clause 4.8.4.3 of the Contract. In layman terms the Employer did not issue a Payless Notice.

Mr. Hough issued his Decision on 27th May 2014.

He ruled that the dispute he was being required to determine was not the same or substantially the same as the Adjudication determined by Mr. Calcroft. He further found that Mr. Calcroft had determined that no certificate had been issued in accordance with Clause 4.8.1 (Final Certificate) and this decision was binding on both the parties and him. However, he determined that the 1st April 2014 notice was an effective notice under Clause 4.8.4.1 (Payment Notice from the Contractor to the Employer) and Brown’s refusal to pay had created this dispute, which was not the same or substantially the same as the one previously dispute.

As Brown had not issued CBSL with a Payless Notice, the sum fell due for payment. Brown was required to pay:

  • £115,440.46 to CBSL within 7 days
  • Interest of £817.70 up to the payment date, increasing at a rate of £17.90 per day until paid
  • The Adjudicator’s fees of £1,944.

Brown did not pay and on 11th June 2014 CBSL initiated proceedings in the Technology and Construction Court (TCC) Manchester District Registry. They were granted permission to issue an application for Summary Judgment. Brown applied for an adjournment and an application to transfer the proceedings from Manchester to London. They did not however pay the required fee for the request to transfer.

Judge Raynor QC refused the application to Adjourn and ruled in CBSL’s favour on 10th July 2014. He found that the sum of £118,500 was due, with costs summarily assessed at £6,000. However he stayed execution of the judgment until 8th August 2014. Brown had to make application to set aside by 8th August 2014.

Brown applied on 31st July 2014 for the order to be set aside and have the hearing transferred to London. Judge Raynor QC dismissed the application in a fully reasoned judgment and Brown was further ordered to pay costs, summarily assessed at £5,750.

It is from this judgment Brown made an appeal to the Court of Appeal.

The issue and the argument

A number of case law precedents were cited by both parties. The applicable principles are summarised as follows:

  1. The parties are bound by the decision of an Adjudicator on a dispute or difference until it is finally determined by court or arbitration proceedings or by an agreement made subsequently by the parties.
  2. The parties cannot seek a further decision by an adjudicator on a dispute or difference if that dispute or difference has already been the subject of a decision by an adjudicator.
  3. The extent to which a decision or a dispute is binding will depend on an analysis of the terms, scope and extent of the dispute or difference referred to adjudication and the terms, scope and extent of the decision made by the adjudicator. In order to do this the approach has to be to ask whether the dispute or difference is the same or substantially the same as the relevant dispute or difference and whether the adjudicator has decided a dispute or difference which is the same or fundamentally the same as the relevant dispute or difference.
  4. The approach must involve not only the same but also substantially the same dispute or difference. This is because disputes or differences encompass a wide range of factual and legal issues. If there had to be complete identity of factual and legal issues then the ability to re-adjudicate what was in substance the same dispute or difference would deprive clause 9.2 of The Scheme for Construction Contracts (England and Wales) Regulations 1998 (The Scheme) of its intended purpose.
  5. Whether one dispute is substantially the same as another dispute is a question of fact and degree.

The reference above to “fact and degree” are interpreted from further case law precedent from a 2006 Court of Appeal case, Quietfield Limited v. Vascroft Construction Limited [2006] EWCA Civ 1737 where the matter of an Extension of Time (EoT) was referred to Adjudication and Determined. The matter was subsequently referred to Adjudication again, however the Adjudicator determined he did not have jurisdiction as this was the same dispute. At the Court of Appeal it was found:

  1. Clause 9.2 of The Scheme provides that an Adjudicator must resign where the dispute is the same or substantially the same as one which has previously been referred to Adjudication with a decision reached. It must that the parties may not refer a dispute to Adjudication in these circumstances.
  2. This mechanism being adopted to protect respondents from having to face the expense and trouble of successive Adjudications on the same or substantially the same dispute. There is an imperfect analogy here with the rules developed by the common law to prevent successive litigation over the same matter
  3. If the first Adjudication is substantially the same as the second Adjudication is a question of fact and degree. If the contractor identifies the same Relevant Event in successive applications for EoT, but gives different particulars to its expected effects, the differences may or may not be sufficient to lead to the conclusion that the two disputes are not substantially the same. Particularly if the particulars of expected effects are the same, but the evidence by which the contractor seeks to prove them is different.
  4. Where the only difference between disputes arising from the rejection of two successive applications for an extension of time is that the later application makes good shortcomings of the earlier application, an Adjudicator will usually have little difficulty in deciding that the two disputes are substantially the same.

The central claim made by Brown was that Mr. Hough was being asked to determine the same or substantially the same dispute as Mr. Calcroft had been asked to determine. This was further reinforced as it was for the same sum of money, with the only material difference being no valid Final Certificate in the first Adjudication

Decision

  1. A further case was quoted, this being Matthew Harding (trading as M J Harding Contractors) v. Paice and Springhall [2015] EWCA Civ 1281 where it was stated in the text of the Judgment:

It is quite clear from the authorities that one does not look at the dispute or dispute referred to the first adjudicator in isolation. One must look at what the first adjudicator actually decided. Ultimately it is what the first adjudicator decided which determines how much or how little remains for consideration by the second adjudicator.

It was found in a unanimous decision that in the second Adjudication, the Adjudicator was both entitled and correct to conclude that he was not considering the same or substantially the same dispute as the first Adjudication. Mr. Hough had recognised that both parties were bound by the Decision in the First Adjudication that the Final Certificate was ineffective and that the letter of 20th December 2013 was not a valid notice under the Contract. Mr. Hough was being asked to determine if a different notice served 4 months later had different consequences.

While both Adjudications relied on the ineffectiveness of the ‘Final Certificate’ and claimed the same sum, the Relevant Event was CBSL’s notice of 1st April 2013. Neither this notice nor the consequence of it (CBSL’s entitlement to be paid if no Payless Notice was issued served) gave rise to dispute referred in the first Adjudication. Crucially CBSL were not making good a shortcoming in the earlier letter by bring a new claim via a new and different route as it relied on a letter issued after the Decision of the first Adjudication and therefore raised a different dispute. This had been dealt with by Judge Raynor QC in his judgment, “what was decided in the First Adjudication was the ineffectiveness of the notice given in December 2013. That was not raised at all as an issue in the Second Adjudication.”

The appeal was therefore dismissed.

 

What is the lesson here?

It the same lesson as in Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC), follow the contract and stick to its strict timetables particularly around the Payment Mechanism

In this case Brown could have protected themselves by issuing a Payless Notice, but did not. There would still have been a dispute, that is clear, but as the second Adjudication was found to be a different dispute, so too would a second Adjudication where a valid Payless Notice was in place.

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The Referral Notice

While all of documents submitted in Adjudication are important, as each submission builds up the picture that the parties are trying to convince the Adjudicator is most plausible and believable, it all starts with the submission of the Referral Notice by the Referring Party.

To commence the Adjudication process, the Referring Party must serve on the other party a written notice of your intent to refer the dispute to adjudication. This ‘Notice of Adjudication’ defines the issues that you will be seeking the Adjudicator to consider. It is therefore critical that it includes all the key points as well as the remedy you are seeking.

As a general rule, the Notice of Adjudication should include the following information:

• Details of the contract

• Description of the dispute

• Details of where and when the dispute arose

• The remedy sought

• The names and contact details of the parties to the dispute.

When the Adjudicator is appointed by the Adjudication Nomination Board, he will request the Referral Notice is submitted within 7 days usually. Therefore it is key is to have this document prepared when the “Notice of Adjudication” is sent, to ensure the Responding Party are always under pressure.

The Referral Notice sets out the issue that is at dispute, the reason for bringing an Adjudication, a timeline demonstrating why the Referring Party believe the Adjudicator should find in their favour and perhaps most important of all the remedy that the Referring arty is seeking.

So this lends the question, how should a Referral Notice be set out?

The first and most obvious answer is perhaps the one most ignored and overlooked. The Referral Notice needs to be simple and concise, but stating the issues and how they have arisen and must be very easy for the Adjudicator to follow what the dispute is about and then most importantly what you, the Referring Party ask the Adjudicator the determine and award.

Everyone will have their own way setting out a Referral Notice. It is my view that is should be set out in two volumes. Volume 1 being the Referral Notice itself and Volume 2 all of the Appendix that are referenced in Volume 1.

Volume 1 should then be set out in with the following sections:

Detail In the ‘Assessment of the Amount Due

This being a preamble where in one paragraph you sum up the details of the contract and the issue that is in dispute and that the Referring Party is seeking to have the Adjudicator determine.

Executive Summary

This is the effective summary of the entire document that you are going to lead the Adjudicator through in order to have the Determination in your favour.

The Executive Summary should start by stating the Parties to the contract that is in dispute, the nature of the dispute and then a short précis of the actual dispute.

The final paragraph should leave the Adjudicator under no illusions that this was the only way that the dispute was going to be resolved, with wording such as the following.

The Referring Party has therefore had no alternative but to commence this Adjudication in order to have their contractual entitlement to the [nature of dispute] confirmed by an Adjudicator.

Definitions, Abbreviations & Clarifications

This section is exactly what it says, where you want the Adjudicator to be clear what a particular term you may need to use frequently you provide the definition of the term, often this will be taken from the contract between the parties, for example:

“Additional Services”

means any services, additional to the Services, that the Consultant is instructed to carry out in accordance with clause 12 as a Services Variation;

“Building Contract”
means the main building contract entered into between the Contractor and the Client dated 10th October 2015 for the design and construction of the Works, a paper copy and electronic copy of which have been made available to the Consultant;

“Consultant’s Application Date(s)”
means the date 4 days before the relevant Contractor Application Date;

“Consultant’s Representative”
means Mr Kapil Dev (or such other person as the Consultant may appoint and who is approved by the Contractor in accordance with clause 4) who will perform the role of the Consultant’s Representative as set out in clause 3;

Likewise where you are going use standard terms regularly then you show how how going to abbreviate them, for example:

EoT – Extension of Time

JCT – Joint Contract Tribunal Minor Works Contract 2011

AfP – Application for Payment

In order to assist the Adjudicator the first time the term is mentioned it is preferable to include the full wording and then the abbreviation before using only the abbreviation going forward, for example.

this Extension of Time (EoT) is from 21 January

Finally you can also include any clarifications of how you have referenced items in the document, for example you may use Italics when quoting others or the contract, for example:

Final Payment [5]

4.12 1 The amount of the Final Payment to the Sub Contractor shall be the Final Sub-Contract Sum, which shall be calculated by the Contractor in accordance with whichever clause 4.3 or 4.4 applies, less only the total amount previously paid as interim payments under the Sub-Contract.

Clarification / Amplification of the assessment of the amount due.

This section is where you begin “walking” the Adjudicator through the case, what it’s about and ideally in chronological order, however written in such a way that it is easy to follow for the Adjudicator to understand and where necessary each and every event written and detailed in such a way that a completely independent person should be able to pick up the document and read it from cover to cover and understand the following:

• How the contract was formed, particularly in relation to the dispute

• How the contract has been administered by both parties and in particular the breach by the Responding Party

• If the breach has been consistent and regular, how this has occurred and when rectified (if at all)

• The measures that the Referring Party has taken to avoid Adjudication by trying to reach an amicable but fair settlement

• The remedy (in broad terms) that the referring party is seeking to have imposed. E.g. the payment of a sum of money, or the method of measurement etc

What is clear though is that by the end of the Adjudicator reading this section is that they understand the form of contract and clause under which the dispute is brought, the issue and how it has occurred, why the Referring Party’s assertion is correct and the remedy sought to correct the situation.

The Mechanism by which the Amount Due has been calculated

This section is quite clear in the title, but vital as it shows in detail what the Referring Party believes they are entitled to, and the basis of calculation.

This calculation can be complex in the event it’s a re-measurement or quite simple if it relates to a payment not made. However what it critical is that the calculation and its basis is clear and unambiguous.

This section is short and concise and should be no more than three to five paragraphs. The intention of it is to crystallise for the Adjudicator the sum claimed based on the details of the argument which they will have just reviewed in the step by step clarification of the previous section.

The Assessment of the Amount Due

This section is a follow on from the previous where you are stating how you have calculated the sum you are claiming and on what basis it is being calculated. In this section the intention is to state it quite clearly, for example:

10.1 Adjudication

The Remedy Sought

By now the Adjudicator must be clear from the dialogue that has been provided in the Referral Notice of what the form of contract is, the nature of the dispute, how the dispute has transpired, what the Referring Party believes they are entitled to to correct the breach and how this entitlement has been calculated.

Up until now the Adjudicator will have a fairly sound understanding of the remedy you seek, but in this final section it is summed up in a number of key points. These will include but not be limited to the following:

• Adjudicators Cost – As the Referring Party believes in their case and that they will prevail you request that the Adjudicator finds in your favour in relation to his fee. Some Adjudicators will stick with the spirit of split costs, but others may apportion costs based on their Judgement. For example if every claim you have made is determined in your favour then it should only be right and proper that you are awarded the cost.

• Interest – Where the sum you are claiming is late than you are entitled to interest under the Late Payment of Commercial Debt Regulations, together with a penalty charge dependent on the sum owed. Here you must assert your right under the regulations, state the interest rate (statutory or the rate inserted in the contract) and your basis of calculation. This is to ensure it is in accordance with the Regulations, particularly calculated on a simple interest basis per day. The following are model words that can be used:

The Referring Party asserts that interest be levied from the final date of payment as determined by the contract until payment is made at the Bank of England Base Rate prevailing at the time the amount became due, plus 5% (Five Percent) per day calculated on a simple interest basis. The Bank of England Base Rate during the period of the contract works has been 0.500%. (Half of One Percent) and therefore assert that the interest rate is 5.5% (Five and a Half Percent). The Referring Party further assert their right to the Fixed Charge of One Hundred Pound Sterling (£100) under the Late Payment of Commercial Debt Regulations 2013. This sum has been calculated up to the date of the Notice of Adjudication

• Payment Period – Here you request the Adjudicator to determine when (in the absence of any contractual requirement) any award that is made in your favour must be paid by. This should never be immediately, as this is not feasible, but you request that it is no more than 5 working days. However the actual period will be stipulated by the Adjudicator as part of the Judgement.

• Balanced Judgement – As Adjudication is considered “rough justice” as it does not have the same format at legal pleadings this remedy is effectively to state that whilst the Referring Party assert their rights to the sum claimed etc that they claim they also respect the Adjudicators right to determine a sum that is different based on the evidence provided by both parties.

• Summary Judgement – Whist this will be a legal remedy available in the event of default it is preferable to include it for good measure.

As stated at the start of this section the remedy requested will be to suit the basis of the Referral Notice although this post has been written from the perspective that it relates to payment, as this is the basis of the majority of disputes.

Volume 2

As stated earlier it is preferable to submit the document as two volumes as then where in Volume 1 you draw the Adjudicators attention to a specific document this is then included in full in the Volume for ease of reference.

This volume will be made up of two parts usually:

• Attachments – These are documents specifically produced for the Referral Notice such as the interest calculation under the Late Payment of Commercial Debt Regulations and should be referenced, for example:

A            Document produced for this Referral Notice
               Cedars Housing Association – Interest calculation

• Appendices – These are documents that form part of the contemporaneous records and should be referenced, for example:

1            Electronic Mail
              12 October 2014 (Mr Robert Mugabe to Mr Stuart Lancaster)
              RE: Failure to make Payment in accordance with the Contract

This Referral Notice will be the commencement document for Adjudication and how it is constructed will in most instances go a long way towards determining the outcome. It is therefore critical that it is done professionally, although that would always be the stance of someone looking to be engaged for this process. However it is the seminal document and while it could cost a significant sum to prepare, it can also result in the remedy that you require.

The Adjudication Process

Adjudication was introduced as a fast track ADR process with a binding decision usually delivered by the Adjudicator within 28 days.

The major commercial advantage of Adjudication is the speed and relatively low cost of the process when compared to litigation, with an enforceable decision being reached. The cost of Adjudication was discussed in the previous posting, but a word of caution as while the Adjudicators cost may be recoverable where successful generally the legal and expert fees are not normally recoverable, even by the successful party. This means there is no room for error, and mistakes can be expensive.

As an enforceable decision is reached so quickly, adjudication is now the most powerful, universally accepted ADR method to resolve disputes in the UK Construction Industry.

The Process

As discussed in the previous post all construction contracts are now able to set in motion Adjudication. However there is a caveat here in relation to domestic contracts. Under these form of contract you only have the right to Adjudication if the Adjudication clause has been included in the contract, or by subsequent written agreement. In this instance the rules for the Adjudication will be confined to those defined in the contract clause or agreement.

The reasoning for not including Householders / Consumers in Adjudication is to protect them from a process that can be onerous. However this should also be balanced against the potential cost for the same consumer to institute legal proceedings to assert a legal right under the contract. Therefore including this provision in a contract, should be beneficial in the event of a dispute. However even here this can be caveated as either party can commence the Adjudication an unscrupulous builder could take advantage of the relative naivety of the Householder. It is why if the contract is going to be a standard form, such as the Joint Contract Tribunal Minor Works form, then not only should the Adjudication clause be activated but also a Contract Administrator be appointed to act impartially between the two parties.

Householders / Consumers can use the Consumer Adjudication Scheme promoted by the JCT in its Homeowner Contract. The JCT Consumer Adjudication Scheme is capped at £100 (Exclusive of VAT) per hour with a maximum of 10 hours, which caps the cost of the Adjudicator at £1,000 (Exclusive of VAT)

To Adjudicate or Not

As the cost of preparation for Adjudication can be relatively expensive and is not generally recoverable whatever the result, the first route to resolution should be negotiation and discussion. However cases that end in Adjudication, particularly in relation to payment, are usually as a result of the Employer failing to make payment and refusing to engage further. This is usually after the practice of “Subby Bashing” has been employed to try to reach the best financial outcome for the Employer.

The only other real concern will be over any future works with the Employer and how the Adjudication will be received by the senior management of the company. Even here it could even be favourable as it may show practices that the Directors were unaware of.

The reality is that if there is sufficient distances between what the Employer is prepared to pay and what you need to continue to function as a going concern, then not only will future relationship not be a consideration but provided you case is strong then Adjudication will be the only option.

The First Step

The first step actually starts when you enter into contract and it’s the three R’s, Records, Records, Records. As Adjudication in its plainest form is two people telling a third a story and he will decide who is more likely to be telling the truth, record keeping is paramount.

Most parties to a contract seem to think it’s a document that is put in place and then never followed. The second step is to follow the contract, in particular around how to submit Interim Application for Payment, Employers Instructions and Variations. Additionally where a contract is entered into and quantities are fixed, ensure the basis of agreement is included as an Appendix, likewise the method of measure for a re-measurable contract. In short, put the effort in at the start so that is Adjudication is inevitable then you have a strong chance of success from the start.

Seeking Advice

It is quite possible for anyone to commence and manage an Adjudication, however the chance of success is greatly enhanced by using a company that specialises in ADR (I would say that I want your business). But it is also true that you will enhance your chance of success and if you are the Referring Party (the party that refers to Adjudication) it is often likely that the Responding Party will be represented by a specialist company.

Adjudication is often referred to a “rough justice” as its far less informal than litigation and an initial assessment of your case by a specialist can often be the deciding factor, as this is a results business and no-one wants to recommend a company commence the pre planning for Adjudication with little or no chance of success. £5,000, £10,000, £20,000 of turnover will be far out-weighed by the negative perception that will follow a badly advised Adjudication.

So we have received advice and have decided that Adjudication is the only route open to resolve the impasse and dispute, next is timing and a little bit of secrecy.

As the Adjudication is a fast tracked solution and is usually 28 days from start to finish, the secrecy bit is that it will place additional pressure on the Responding Party if the first they know of the Adjudication is when they received the Notice of Appointment. Although in reality when there has been a series of letters written and these contain the threat of Adjudication, these threats are often ignored.

The ideal process will then be to commence collating all the documents that you would be seeking to use as Exhibits to demonstrate your case for the writing of the Referral Notice (We will look at the Referral Notice in greater detail next time)

Once the Referral Notice is complete you will then seek to have an Adjudicator appointed, who must be a professionally qualified expert in their field, and the process will start with his appointment.

In some contracts it will have been pre agreed who the Adjudication Nominating Body (ANB) will be and even the Adjudicator named. In these instances these details will need to be included in the form that is completed.

Where a contract is silent on an ANB then you can use any of numerous ANB’s in the country. However there are a small number of real specialist bodies and it would be best to make the Referral to them.

The clock is ticking

The Nomination is complete, the Adjudicator has been appointed and has confirmed no conflict of interest exists that will preclude them taking the case, what next?

The Adjudicator will usually write to confirm his appointment together with the terms & conditions under which he is being appointed, in reality the important part will be the hourly rate he will charge and the terms for his payment.

As the legislation is relatively loosely worded to a certain extent, as the Adjudicator has been appointed there can be no real challenge to his terms and conditions.

As a result of some companies refusing to make payment of the fee’s when the Adjudicator provides his Determination there are instances when the Adjudicator may demand payment up front of a sum on account and then expect this to be replenished as and when it has been expended. This will usually need to be paid by the Referring Party. If the Referring Party is successful then this will form part of “The Award” and if not paid by the Responding Party can be enforced as a debt in the courts.

There are instances where the Adjudicator will undertake the Adjudication without the fee’s being paid up front but will require his fee’s to be settled before he provides his Determination. Again here it is usually incumbent on the Referring Party to make payment and the amount due from the Responding party becomes part of “the Award.” Again if not paid the party in breach can be subject to court action from Summary Judgement of the debt.

Also as part of the appointment the Adjudicator will set a date by which the Referral Notice must be served on the Responding Party with a copy to the Adjudicator. It is deemed that the documents are served at the same time. From this the Adjudicator will set a time table to allow a binding decision in 28 days.

Again this is a fluid timetable from Adjudicator to Adjudicator, but will have the following submissions generally:

• The Responding Party will make their formal response to the claim set out in the Referral Notice as well as its arguments against the specific remedies sought

• The Referring Party will have an opportunity to rebut or clarify the document submitted by the Responding Party and often have to dismiss effective counter claims made within the Responding Parties submission

• Some Adjudicators may allow a further response by the Referring Party although both parties may also then be allowed to make a final submission each, usually to be lodged on the same day.

Following this the Adjudicator will review the submissions (although he may have started this process already before the final submissions) and during the phase after the final documents are lodged and his proposed Determination the Adjudicator will pose questions to either or both parties where they require further information.

This is the period of worry and concern for the parties as they try to second guess the intensions and leanings of the Adjudicator prior to the Determination being delivered.

Adjudication is a relatively inexpensive form of dispute resolution, however an element that is missing is the formal structure of a court and it means that where there is ambiguity an unscrupulous party can bend the truth to suit the claim they are trying to portray, which is where the 3R’s come into play as if either party has all the records, then they are in the strongest position.

Is Adjudication a positive addition to the ADR frameworks?

Absolutely, as it allows the real small companies a voice to assert their right where formal ligation would be prohibitive on cost grounds and can result in a David defeating Goliath scenario.

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.

The Arbitral Tribunal

We have looked at the principles of Arbitration, grounds to commence and how through the New York Convention the award in the event it is an international Arbitration can be enforced.

As the process is slightly more formalised than other forms of ADR, we need to look at how the process of the Arbitral Tribunal, which is the collective name of the Arbitrator / Arbitrators that sitting to determine the outcome of a referral.

Arbitral Tribunal

Arbitrations are usually divided into two types of Arbitration, these being:

• Ad Hoc Arbitrations; and

• Administered Arbitrations

These two distinctive types of Arbitration can be defined as follows:

In an Ad Hoc Arbitration, the parties or the appointing body determine who the arbitral tribunals will be. Following the commencement of the Arbitration, appointing body will have no further part to play and the Arbitration will be managed by the tribunal.

In an Administered Arbitration, the Arbitration will be administered by a professional arbitration body providing arbitration services, such as the LCIA or ACAS. In normal circumstances the Arbitration body will also be the appointing authority. These Arbitration bodies usually tend to have their own rules and procedures, and may be more formal. As a consequence they tend to be more expensive, and, for procedural reasons, slower to reach consensus and agreement.

The duties of the Arbitral Tribunal

The Arbitral Tribunal duties will be established by a combination of the provisions of the arbitration agreement and by the procedural laws which apply in the jurisdiction of the Arbitration. The extent to which the laws in the jurisdiction of the Arbitration permit “party autonomy” (the ability of the parties to set out their own procedures and regulations) determines the interplay between the parties.

However, in most countries the tribunal owes several non-derogable duties. These will usually be:

• Acting impartially and at all times fairly between the parties, including allowing each party the reasonable opportunity to set out their case and deal with the case of their opponent. This in effect complying with natural justice

• Adopting procedures suitable to the circumstances of the case they are engaged in, which will allow the best possible opportunity for the resolution of the dispute

Arbitral awards

In most cases the Arbitration awards are an award of damages against a party, however in most jurisdictions Arbitral Tribunals will have a wide range of remedies that can form a part of the award. These could include:

1. The payment of a sum of money, also known as conventional damages
2. The making of a “declaration” to any matter that was to be determined in the Adjudication

Arbitration in some jurisdictions can have the same powers of a legally constituted court and then will result in it have its own set of powers which may include:

1. Ordering a party to undertake or refrain from an activity, this is known as Injunctive Relief

2. Ordering the specific performance that may be required under the contract

3. Ordering the rectification, setting aside or cancellation of a contract or other document.

In other jurisdictions, the parties may have expressly granted the Arbitral Tribunal the right to decide these matters and while Arbitral Tribunal powers may be limited to deciding whether a party is entitled to damages. However the Arbitral Tribunal may not have the legal authority to order injunctive relief, issue a declaration, or rectify a contract, with these powers being reserved to the exclusive jurisdiction of a legally constituted court.

Challenge of an Arbitral Tribunal Award

In normal circumstances arbitration proceedings will tend not to be subject to appeal, in the traditional sense of the word.

However, in most countries, the court system will maintain a supervisory role to set aside awards in extreme cases, such as where there has been a serious legal irregularity which has impeded natural justice or where the decision may have resulted in fraud. Usually only domestic Arbitral awards are able to be set aside.

The cost of an Arbitration

Under both civil and common law in a large number of legal systems it is normal practice for the courts to award the legal costs of the case against the losing party. In effect the winner becomes entitled to recover an approximation of what was spent in pursuing the claim or defence of a claim brought against it.

Much like courts, Arbitral Tribunals usually have the same power to award costs in relation to the determination of the dispute.

In both domestic and international Arbitrations, governed by the laws of countries in which courts may award costs against a losing party, the Arbitral Tribunal will determine the proportion of the arbitrators’ fees that the losing party will be required to pay.

The cost of arbitration can generally be relatively accurately estimated on the websites of international arbitration institutions as well as on website of the International Arbitration Attorney Network. However the overall cost of administrative and arbitrator fees in a domestic Arbitration is on average less than 20% of the total cost of international arbitration.

Next time we will look at Adjudication.

New York Convention

The 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards is without doubt the most important international instrument on Arbitrational Law.

There will be other International Instruments’ that many people will have at least heard of if not be familiar in some ways with. These include:

• The Geneva Protocol [1923]

• The Geneva Convention [1927]

• The European Convention [1961]

• The Washington Convention [1965]

• The UNCITRAL Model Law

• The UNCITRAL Arbitration Rules

Enforcement of International Arbitration Decisions

Grounds on which Arbitrations decisions can be challenged are contained in Article V of the New York Convention and this provided an exhaustive list of grounds. However these are narrowly construed to uphold the pro-enforcement bias of the Convention.

The defences under Article V are as follows:

1. one party to the arbitration agreement was, under the applicable law, under some incapacity;

2. the arbitration agreement was not valid under its governing law

3. one party was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings, or was otherwise unable to present its case

4. the award deals with an issue not contemplated by or not falling within the terms of the submission to arbitration, or contains matters beyond the scope of the arbitration

5. the composition of the arbitral tribunal was not in accordance with the agreement of the parties or, failing such agreement, with the law of the place where the hearing took place (the “lex loci arbitri”)

6. the award has not yet become binding upon the parties, or has been set aside or suspended by a competent authority, either in the country where the arbitration took place, or pursuant to the law of the arbitration agreement

7. the subject matter of the award was not capable of resolution by arbitration 8. enforcement would be contrary to “public policy”.

There are also three types of reservations that countries may apply, these being:

1. Conventional Reservation – some countries only enforce arbitration awards issued in a Convention member state

2. Commercial Reservation – some countries only enforce arbitration awards that are related to commercial transactions

3. Reciprocity reservation – some countries choose not to limit the Convention to only awards from other contracting states, but may however limit application to awards from non-contracting states such that they will only apply it to the extent to which such a non-contracting state grants reciprocal treatment.

States may make any or all of the above reservations. Because there are two similar issues conflated under the term “reciprocity”, it is important to determine which such reservation (or both) an enforcing state has made

In the majority of instances It is easier to enforce Arbitration awards in a foreign country than a judgement by a rightfully constituted court. Under the Convention, an award issued in a contracting state can generally be freely enforced in any other contracting state, only subject to certain, limited defences as contained in Article V.

Only foreign arbitration awards are enforced pursuant to the New York Convention. An arbitral decision is deemed to be foreign where the award was made in a state other than the state of recognition or where foreign procedural law was used.

There are currently 156 signatories to the New York Convention, which is virtually every significant country with a robust commercial dimension is party to the Convention and very few countries have a framework for cross-border enforcement of judgments by their courts.

Typically monetary only judgements by rightfully constituted court are enforceable in a cross-border context. In an international enforcement of an Arbitration it is possible, although unusual, to obtain an enforceable order for specific performance in an arbitration proceeding under the New York Convention.

As virtually every significant country with a robust commercial dimension is party to the Convention it is more expedient to list those countries which are NOT signatories.

• Angola

• Belize

• Cape Verde

• Chad

• Republic of the Congo

• Equatorial Guinea

• Eritrea

• Ethiopia

• Gambia

• Grenada

• Guinea-Bissau

• Iraq

• Kiribati

• North Korea

• Libya

• Malawi

• Maldives

• Federated States of Micronesia

• Namibia

• Nauru

• Niue

• Palau

• Papua New Guinea

• Saint Kitts and Nevis

• Saint Lucia

• Samoa

• Seychelles

• Sierra Leone

• Solomon Islands

• Somalia

• South Sudan

• Sudan

• Suriname

• Swaziland

• Taiwan

• Timor-Leste

• Togo

• Tonga

• Turkmenistan

• Tuvalu

• Vanuatu

• Yemen

It should also be noted that Taiwan has not been permitted to adopt the Convention, although it generally enforces foreign arbitration judgments.

Next time we will look at the format, composition of and outcome of Arbitration.

Arbitration

Arbitration is effective a step up in Alternative Dispute Resolution (ADR) from the previous topic, Mediation.

If we were to define Arbitration, it would be as follows:

Arbitration is a technique for the resolution of disputes outside the court systems whereby the parties refer a dispute to be determined by one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal”). The parties agree to be bound by the arbitration decision (the “award”) whereby a third party reviews the evidence in the case and imposes a decision that is legally binding on both sides and enforceable in the courts.

Much like Mediation, Arbitration can be voluntary or mandatory, although for it to be mandatory this has to be by statute or where in relation to a contract, where the contract has been freely entered into by the parties. In effect the parties are agreeing in advance of the contracted works to refer all existing or future disputes to arbitration, without necessarily knowing, specifically, what disputes will ever occur, if any.

An ambiguous consequence of Arbitration is where the parties agree to “non-binding” Arbitration.

Non-binding Arbitration is similar to Mediation in that a decision cannot be imposed on the parties. The key distinction is that where a mediator will try to help the parties find a middle ground on which to compromise in a binding Arbitration, in a non-binding Arbitration. The arbitrator remains removed from the settlement process and only gives a determination of liability and, if appropriate, an indication of the quantum of damages payable. Therefore by our definition non-binding Arbitration is technically not Arbitration.

What are advantages and disadvantages of Arbitration?

Advantages
• In litigation the parties do not choose the judge, whereas Arbitration allows the parties to choose their own tribunal. This is especially useful when the subject matter of the dispute is technical as the arbitrators with an appropriate degree of expertise can be chosen. For example a quantity surveyor in the case of a construction dispute

• Arbitration can be cheaper and more flexible for a business dispute and will usually be significantly quicker than litigation, which can take months or years to resolve
• Arbitral proceedings and the arbitral award are usually confidential and therefore remain secret
• The language of an Arbitration may be chosen whereas in litigation the official language of the country of the relevant court will apply, which can have cost implications of their own

• As a result of the New York Convention of 1958, Arbitration awards are normally easier to enforce in other nations than court verdicts. This will be reviwed in greater detail next time

• The duration of a dispute can be limited as most legal systems offer extremely limited opportunities to appeal an arbitral award

Disadvantages
• Arbitration can be subject to pressures from large law practices representing the stronger and wealthier party

• Arbitration agreements can be contained in ancillary agreements, or in small print in other agreements, and particularly consumers and employees may not know in advance that they have agreed to mandatory binding pre-dispute arbitration by purchasing a product or taking up an employment offer

• Where the arbitration is mandatory and binding, the parties have waived their rights to the courts to have a judge or jury decide the case

• In some arbitration agreements, the parties are required to pay for the arbitrators. This adds a layer of legal cost which can be prohibitive, particularly in small consumer disputes

• Some arbitration agreements and systems do not allow the recovery of legal fees, making it extremely difficult for consumers or employees to obtain legal representation, although most arbitration codes and agreements provide for the same relief that could be granted in court

• The very limited avenues for appeal mean erroneous decision cannot be easily overturned
• Whilst Arbitration is usually a relatively quick process, when there are multiple arbitrators on the panel, aligning their schedules for hearing dates in long cases can lead to delays

• In some legal systems, arbitral awards have fewer enforcement options than judgments

• Applicable law, as stated in the contract, is not necessarily binding on the arbitrators, although they cannot rule in contravention of the law

• Discovery may be more limited in arbitration or non-existent

• Court judgments are directly enforceable, whilst Arbitration awards themselves are not directly enforceable and requires a party to enforce an Arbitration award via judicial remedies or an action to “confirm” the award

• Whilst grounds for contesting an award in court are severely limited, efforts to confirm the award can be fiercely contested resulting in significant legal fees that can negate the initial economic incentive to arbitrate the dispute to begin with

There are generally two types of Arbitration agreements, these being:

• Agreement that if a dispute arises, this will be resolved by Arbitration. These will generally be in formalised contracts with a clause that contains the agreement in relation to Arbitration

• Agreement after a dispute has arisen in the absence of a formalised Arbitration clause, agreeing that the dispute should be resolved by Arbitration. This is also known as a Submission Agreement

An Arbitration clause in a contract is the more prevalent type of Arbitration agreement and can hold legal significance. By way of an example, in some British Commonwealth countries, but not including England and Wales, it is possible to provide that each party should bear their own costs in a conventional Arbitration clause, but not in a Submission Agreement.

The law, in keeping with the informality of Arbitration is keen to uphold the validity of Arbitration clauses even where they lack the formal language associated with legal contracts. There have been instances where courts have upheld clauses which specify resolution of disputes outside of the specific requirements of the legal system.

An agreement to refer a dispute to Arbitration usually has a special status in the view of the legal system. By way of an example, a common defence in a disputed contract is to plead that the contract is void and by consequence any claim based upon the contract fails. This would have the implication that, if successfully claimed, that every clause within the contract would be void.

In most countries, the courts have accepted:

I. A contract can only be declared void by a court or other tribunal; and
II. If the contract (valid or otherwise) contains an Arbitration clause, then the proper forum to determine whether the contract is void or not, is the arbitration tribunal.

It could be argued either position is potentially unfair particularly if a person is made to sign the contract under duress and the contract contains an Arbitration clause which favours the other party, then the dispute may still referred to that Arbitration tribunal

In the alternative, a court may be persuaded that the Arbitration agreement is void having been signed under duress.

However the courts will be reluctant to interfere with the general rule which for commercial expediency allows any other solution, as this would be self-defeating. In effect a party would first have to go to court to decide whether they had to participate in Arbitration.

Arbitration is regulated in different legal jurisdictions through a variety of laws. The main body of law applicable to Arbitration is normally contained either in the national Private International Law Act (this applies to Switzerland for example or in a separate law on Arbitration (this applies in English law). There may also be a number of national procedural laws that may contain Arbitration provisions.

Next time we will look at the New York Convention of 1958.