Tag: Adjudication

The Scheme for Construction Contracts

In recent posts we have seen two pieces of Primary Legislation being referred to, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. Intrinsic to this legislation is The Scheme for Construction Contracts, a Statutory Instrument that has come into force following these acts to regulate key elements of the construction process. In this post we will examine The Scheme and its major points.

We must first remember that this legislation refers to “construction activities” as defined in the legislation. While it is not prescriptive and allows some legal interpretation, broadly a construction contract is defined as “all design and construction contracts, including professional appointments, are likely to be construction contracts as long as they relate to construction operations”.

Which leads to the further question of, “What are “construction operations?””

Again this has been left to some interpretation but includes a wide range of construction operations and most common forms of engineering operation, such as civil engineering projects.

Some engineering projects such as mining, nuclear and power generation as well as contracts with residential occupiers are expressly excluded.

Let’s now consider The Scheme for Construction Contracts. Firstly we must remember that there are a different set of regulations in place in England & Wales to those in place in Scotland. In this post we will consider the regulations as they apply in England & Wales.

The Scheme for Construction Contracts

The Scheme for Construction Contracts (England and Wales) Regulations to give them their full title apply when construction contracts do not comply with the primary legislation and either supplements the provisions of the contract where it has deficiencies relative to the requirements of the Act or replaces the contract where it is non-compliant. The purpose is to allow the contract capable of being performed (reducing the likelihood of frustration) whilst allowing regulatory control over its provisions.

The Housing Grants, Construction and Regeneration Act applies  to all contracts for “construction operations” and sets out the requirements relating to Adjudication and payment, including:

  • The right to commence Adjudication
  • To be paid in interim, periodic or stage payments.
  • To be informed of the amount due, or any amounts to be withheld.
  • To suspend performance for non-payment.
  • Disallowing pay when paid clauses.

Part 1 of the Scheme makes provision for Adjudication where the contract does not comply with the requirement and Part 2 replaces those provisions in relation to payment that do not comply.

The 2011 amendments to The Housing Grants, Construction and Regeneration Act

The Housing Grants, Construction and Regeneration Act 1996 was amended in October 2011 by the Local Democracy, Economic Development and Construction Act 2009 to close loop holes within the original legislation and as a result The Scheme for Construction Contracts was also amended to reflect the amendments. These amendments and their implication have been outlined in previous posts but can be broadly summarised as follows:

  • The act now applies to all construction contracts, even those not evidenced in writing
  • Adjudication clauses must still be in writing
  • Who will bear the cost of Adjudication can no longer be defined in the contract
  • The Adjudicator has the right to correct errors in contracts within 5 days of delivering a Determination
  • Payment dates must be set out in the contract.
  • A Payment Notice must be issued five days of the date for payment, even if no amount is due, although alternatively, if the contract allows, the Contractor may make an application for payment, which is treated as if it is the Payment Notice
  • A Pay Less Notice (previously a Withholding Notice) must be issued where it is intended to pay less than the amount set out in the Payment Notice, including the basis of calculation of the amount being paid less
  • The notified sum is payable by the final date for payment
  • Where a Payment Notice is not issued, the Contractor (or Sub-Contractor) may issue a Default Payment Notice
  • Pay when certified clauses are no longer allowed and retention release cannot be prevented by conditions within another contract.
  • The provisions around the right to suspend for non-payment have been expanded to allow costs to be claimed as well as the right to an Extension of time as consequences of any statutory suspension

These amendments apply to construction contracts entered into on or after 1 October 2011 in England and Wales, and 1 November 2011 in Scotland.

In the next post we will look at Part 1 (Adjudication) of The Scheme for Construction Contracts and the legal requirements and in the post after that Part 2 (Payment).

Ansell Murray Limited Commercial Support

In the previous post we reviewed the outline of how the construction industry in the United Kingdom treats Sub Contractors and Sub-Sub Contractors. In this post we will examine how the little guy can strike back by just using the available rules, regulations and legislation together with their own Sub contracted commercial support.

Ansell Murray Limited as a boutique Consultancy is able to offer commercial advice and support at any time of the life cycle of the works as well as, as much or little support as is required. A new company may need robust systems to capture what they are doing and more mature business may be expanding on taking on works where not only the contract to be entered into is more complex and onerous but may require more compliance.

In the following sections we will set out typical functions that can be undertaken.

Pre Contract Advice / Support

As the title implies these are activities that take place prior to a contract being awarded and can even be in support of a tender and include:

  • Build up of “Actual Cost” rates for Labour, Plant and Materials
  • Preliminaries Build up and Requirements
  • Estimating
  • Review of proposed form and contract and schedule of amendments
  • Design implications (Professional Indemnity & Warranty requirements)
  • Condition Precedents and their potential Implications
  • Main Contract programme requirements and support
  • Notice Service requirements
  • Specific recurring requirements of the contract

Of course nothing is going to stop “subby bashing,” however the risk of payment problems can also be reduced by ensuring that a fair contract and contract procedures are in place.

Ideally, you should incorporate your own Terms & Conditions of business into any order which can be done by careful submission prior to commencing work, making the last document on file the contract.  If this is achieved it can only be trumped by the later signing of a formal contract, which does not have to be done before payment is to be made, such malpractice is outlawed by the Construction Acts.

Ansell Murray Limited are well placed to assist in this key pre contract activity to ensure many of the terms in the contract cannot be turned into disastrous “subby bashing” tools.

Contract period Advice / Support

During the period of construction works the works can either run smoothly with little or no real change in what has been contracted for and at the other extreme can be delayed and disrupted, subject to dispute. Ansell Murray Limited to provide commercial and project management support at both ends of the spectrum as well as the eventualities in between.

  • Application for Payment support, including dealing with all contractual reporting requirements
  • Management of Change Control, be these Variations or Compensation Events
  • Payless Notice support
  • Robust support of Variation / Compensation Event entitlements
  • Robust support against Contra Charges for additional contractor labour
  • Claim of Compensation and associated interest for Late Payment
  • Invoicing and Payroll (Employee’s and Sub Contractors)
  • Management of supply chain commercially, including ensuring back to back contract provisions and reporting to the supply chain
  • Notice service requirements
  • Insurance liability
  • Programme management, including period updates

In the event Ansell Murray Limited had been utilised during the Pre-Contract phase our primary objectives are to ensure the following are as favourable as possible to the Sub Contractor:

  • Onerous payment periods and lengthy due dates are removed and are at worst in line with legislation defaults
  • Retention, Liquidated and Ascertained Damages, Main Contractor Discount advice and support
  • Letters of intent where issued and being subject to Contract
  • Condition precedents (Extension of Time, Loss & Expense entitlements and Practical Completion)
  • Unrealistic programmes, time requirements & time essence clauses
  • Ensure “Pay when paid” or “Pay when certified” clauses are removed and are in line with current legislation
  • Termination and Suspension rights
  • Set off clauses are removed
  • Onerous adjudication clauses are removed and are in line with The Scheme for Construction Contracts.
  • Insolvency of the Employer and or Contractor advise and support

During the construction phase there is often a false belief that there is nothing that can be done about Contractors entering into contracts and then ignoring them, to the detriment of the Sub Contractor undertaking the work.

Because in large organisations people effectively learn how to mechanically undertake their day to day job, many do not understand their duties and obligations under the contract that they are effectively administrating. In effect the rules that protects a Sub Contractor from bad practices

Often the paying parties do not understand the Payment Notice requirements and that their timing and content are critical. As well as this they fail to recognise the power of payment applications becoming the sum due where the rules of assessment and certification are not followed. In effect your payment application becomes the sum due. If the paying party wants to contest this it must prove its case in later proceedings, which if made up and is not supported by contemporaneous evidence will be impossible.

Post Contract Advice / Support

Often a Sub Contractor may provide the works in accordance with the contract, yet the Contractor regularly and consistently under values your works. This is often a precursor to a robust Final Account negotiation where the Contractors seeks to maintain his margin on the project by using your monies. The larger the amount due as a Final Account settlement and the more chance the Contractor will use delay tactics to try and struck the best deal for the Contractor, often to the detriment of the Sub Contractor.

And what can you do? Your works are complete, often you will have made all the payments due to your supply chain, but you need the cash flow to fund the next project.

Contractors know this and will then use this to drive down the agreed final value.

But it does not need to be like this. Ansell Murray Limited can be engaged at Final Account stage purely to ensure that you are paid what you are owed together with any agreement on the amounts of effective free money you want to give the contractor.

This should only be necessary where the objectives are clear that the Contractor is seeking a significant reduction in the final cost he will pay. For the sake of the industry as a whole these companies should be challenged to stop their behaviour for the greater good of all Tier 2 / 3 contractors.

By engaging Ansell Murray Limited during the construction phase our clear objectives are to ensure the value that has been earned by your efforts on site are paid in that period and in effect to make the final account negotiation about the final 5% of the contract value.

Claims & Dispute Advice / Support

Sometimes contracts simply do not happen as planned and if you are the innocent party and have suffered loss the contract between the parties will allow you to be compensated for this. Ansell Murray Limited can provide assistance in setting out contractual claims generally around Loss & Expense and Extension of Time claims.

The United Kingdom construction industry offers its customers great flexibility. Many construction project are not fully designed when they commence and can progress with the design continuing in the background. This means changes in scope are inevitable and change means a revision in price being charged to the Employer and usually the programme. In this environment disputes are ordinary and common place, so too is a settlement that both parties can accept. However this is often dependent on robustness of the change and associated detail in the pricing and impact on the programme that is put forward. If this is not efficiently managed it reduces itself and the project to conflict which can affect overall quality, time and health & safety. Ansell Murray Limited can manage and handle these claim processes to ensure they do not result in a larger dispute. This is not limited to large scale industrial and commercial construction and civil engineering but can be something as small as a fit out of a local shop.

However sometimes the claim ends up as a dispute where both parties believe their stance is correct and the only method to resolve the claim will be through Alternative Dispute Resolution (ADR) as usually the legal option in the Technology and Construction Court (TCC) is prohibitively expensive.

On 1st May 1998 the construction industry took a great stride into the future with the introduction of a statutory right to have a dispute determined by Adjudication. In the subsequent 19 years this process has become entrenched as a relatively cost effective way of having a dispute determined in 28 days. It is a decision which is further binding and can only be overturned, revised or confirmed in Arbitration (if the contract contains an Arbitration clause) or in litigation. Please see previous posts in relation to the mechanism of Adjudication at this link: https://ansellmurray.wordpress.com/tag/adjudication/

Ansell Murray Limited offers support in Adjudication whether you are the party commencing Adjudication [The Referring Party) or to assist in defending where you have been referred to Adjudication (The Responding Party).

Can a party commence its own Adjudication without using a company such as Ansell Murray Limited? The short answer is “Yes” and the slightly longer answer is “It’s not advisable.”

An Adjudication is an argument giving each party a reasonable opportunity of putting his case forward and rebutting the case put by the other party to the contract, with the watchword being fairness.

Why is “It’s not advisable?”

The Adjudicator does not make a case for either party or find the evidence to undermine a party’s case. The role is purely to make a Determination based on facts, evidence, rights and duties in the contract and at law. If an adjudicator investigates at all, it will be to clarify points of fact or law in the party’s case. Therefore it is vital that in preparation of a Referral Notice as the party commencing an Adjudication or in the Response where contesting that the facts are laid out clearly and concisely for the Adjudicator, even where appropriate using legal precedent as a justification of an argument. In reality where there are no legal complexities to be considered the Adjudicator will have little time to do much more than simply make his Determination based on the written arguments of each side.

Of course this entire process is not one-sided and only requires a specialist consultancy such as Ansell Murray Limited. As the real strength (or weakness) of a case for a simple claim or even Adjudication is based on the golden rule or “Records, Records, Records.” These records are your evidence to prove your claim or to disprove a claim made against you. For a claim to be successful it demands good evidence.

Systematic keeping of all site correspondence, instructions, meeting minutes, record photographs (which with modern technology are date stamped), correspondence in writing and electronic mails, site diaries and site resource record sheets. This is also easily verified by the use of technology such as biometric scanners. These are the types of records that help back up a successful claim.

As stated at the start of this post, as a boutique consultancy, Ansell Murray Limited can be your Estimator, Surveyor, Programme Manager, Project Manager, Commercial Manager or Commercial Director. The name on the badge may be slightly different to your organisations name, but we are there to integrate as much or as little into your organisation as you want.

Go to www.ansellmurray.com to view our website and make contact.

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.

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.

Alternative Dispute Resolution – An informal approach

Alternative Dispute Resolution (ADR) is as the name suggests a different way to solve a dispute that has arisen, usually between parties that have a contract in place between them. The concept is essentially to agree a remedy that negates the need for litigation, which as a general rule is prohibitive from a cost perspective. There are three main formal types of ADR in relation to business, these being

  • Mediation
  • Arbitration, and
  • Adjudication

We will look at all three of these forms in greater detail later. When ADR first began to be employed as a dispute resolution mechanism it was anticipated it would be cost effective, but over time the costs have escalated as Adjudication in particular has become more formalised and has become more legalistic in nature. Some parties to a contract have begun to add a new form of ADR to their contracts, which becomes a form of dispute resolution prior to Mediation, Arbitration or Adjudication. For sake of simplicity we will call this form the Resolution Board, particularly where the contracts are collaborative in nature rather than adversarial in nature.

The concept of a Resolution Board is that the parties to the contract will as part of forming the contract nominate two senior executives from each organisation to sit on the board. In the event of a dispute arising either party can refer the dispute to the Resolution Board in an endeavour to have them solve the dispute and allow the contract to continue to function. In order for the dispute to have as small an impact on the overall operation of the contract, the Resolution Board will have a strict timetable to reach a consensus; this is usually 7 days (or 5 working days) from referral.

As the Resolution Board is split 50/50 between the two parties to the contract you would expect the norm to be that the dispute cannot be resolved as the executives will revert to protection of their respective companies position and interests. However where a contract is collaborative in nature it will operate in the spirit of mutual trust and co-operation and this should empower the executives to come to the right decision and not a corporate decision. As mentioned previously the split of the Resolution Board is 50/50 and therefore it requires a simple majority for a decision to be made, in this case a simple majority is 75%, although you would generally find that there are only two real outcomes from a Resolution Board, 100% in favour or a frustrated solution of 50/50.

As a Resolution Board is not a legislated form of ADR, the specifics can be agreed between the parties to be included in the contract. If I was negotiating a contract with this provision in it I would want the following key aspects to be included: The Resolution Board as nominated will be notified in accordance with the contract that a dispute has arisen which the referring party wishes to refer to the Resolution Board A formal meeting of the Resolution Board is called and the referring party and responding party provide a representative to outline the dispute to the Resolution Board members. The Resolution Board may then request further details based on the representation’s made before meeting in private to discuss and provide their determination.

For the Resolution Board to operate effectively and be able to reach a sound decision that can be binding on both parties; a referral needs to be in relation to a material matter that cannot be addressed and resolved by means of the other clauses within the contract. In effect petty squabbles need to be addressed internally without referral.

Following is a Dispute Resolution clause that was recently included in a bespoke contract that I assisted in formulating, although I have changed the wording slightly as to when it refers to other clauses:

Dispute Resolution

• Both parties shall endeavour to notify each other of any anticipated dispute so that any potential dispute can be avoided by negotiation between them in accordance with the notification clause;

• Both parties shall endeavour to resolve any disputes which arise by direct negotiations in good faith between senior executives, the Resolution Board, of their respective organisations and shall give serious consideration to any request by either of them to refer the dispute to mediation, or following a frustrated outcome of a referral to the Resolution Board to consider mediation prior to any other form of Alternative Dispute Resolution (ADR);

• If a dispute is referred to the Resolution Board by either party, the Resolution Board shall meet within 5 working days of the referral where both can parties shall put forward the dispute, how it has arisen and the remedy they seek, prior to determination by the Resolution Board;

• The Resolution Board shall make a binding determination on a simple majority of the Resolution Board. The decision of any Resolution Board shall be binding on, and implemented by, both parties. This does not bar either party seeking further redress through formal ADR procedures;

• If the Contractor and the Consultant cannot resolve any dispute or difference by negotiation then they shall attempt in good faith to resolve it through an ADR mediation procedure;

• Any disputes arising under or in connection with this contract may be referred by either party to Adjudication at any time in accordance with the Scheme for Construction Contracts (as amended);

• In the event the dispute is referred to Adjudication the Adjudication Nominating Body (ANB) shall be the Royal Institute of Chartered Surveyors (RICS);

• The decision of any Adjudicator shall be binding on, and implemented by, both parties pending final determination of the relevant dispute by the English courts;

Is a Resolution Board effective?

It depends on the dispute and how impartial the executives can be to the dispute. In reality, if the executives consider that the Resolution Board will probably have a cost of no more than £5,000 between the parties and Mediation, Arbitration or Adjudication will have a starting cost of at least double that, then this is an excellent form of ADR. But like most things, it’s all about personalities involved.

Next time we will review the key elements of mediation.