Michael Comba traces the origins of adjudication and considers why the process was introduced, who it is aimed towards and how construction contracts must include certain provisions.
Adjudication 101 is a series of four short articles regarding the origins and lifecycle of adjudication. In the series, we look at the background to the introduction of adjudication and the adjudication process from commencement up to the adjudicator’s decision. In the first part, Solicitor, Michael Comba, traces the origins of adjudication and considers why the process was introduced, who it is aimed towards and how construction contracts must include certain provisions.
Adjudication 101: Introduction and Overview
1996 wasn’t just Euro heartbreak, the Nintendo 64 and Clinton v Dole. That year also saw a revolution in construction contracts through the Housing Grants, Construction and Regeneration Act 1996, more commonly known as the Construction Act. Alongside its introduction of mandatory interim payment regimes, changed construction contracts immeasurably by introducing a statutory right to adjudication.
Contractors often operate on very low margins in an industry notorious for delay and disruption. In 2018, the CBI estimated that the average profit margin for a top 100 contractor is 2.6%, compared to 17.6% across all sectors. For contractors, cash really is king. They are particularly anxious not only to get paid, but can also be disinclined to pay others.
This became particularly acute in the context of the early 1990s recession. With cashflow drying up, contractors found it difficult to get paid and were increasingly reluctant to pay subcontractors. Contractor and subcontractor insolvency ensued, causing not only economic problems but also significant supply chain disruption.
The Construction Act brought a solution in the form of mandatory interim payment regimes for construction contracts. This meant that employers and main contractors were significantly constrained from delaying or avoiding payments. However, these provisions still required enforcement, and policymakers did not want to choke the courts, already swamped with construction cases, with payment disputes. Formal litigation also had disadvantages for those in disputes; it is expensive and can become drawn out.
This is where adjudication comes in. The Construction Act confers a statutory right on all construction contracts to refer “any dispute” at “any time” to adjudication. Statutory provisions also provide, as a starting point, for decisions in adjudications to be reached within 28 days. The intention was to ensure parties had an ability to resolve disputes, particularly payment disputes, to an easy, speedy and cost-effective dispute resolution procedure.
In the years since, parties have really run with the term “any dispute”. Adjudication now covers all manner of construction disputes alongside payment disputes, such as delay claims, loss & expense, defects and negligence under professional appointments. Disputes being adjudicated now range in value from the very small to tens of millions.
Nonetheless, the emphasis is still on ‘rough justice’.
The right to adjudicate is implied into all construction contracts, as defined under the Construction Act. The Construction Act defines such quite broadly at s.104; it covers all contracts concerning ‘construction operations’. Construction operations are defined at s.105 and concerns all manner of conceivable construction activities, including things like professional consultants and maintenance. The Construction Act was amended in 2009 to remove the requirement for such contracts to be in writing.
These provisions are subject to a few exclusions; contracts with residential occupiers are excluded and further contracts are through the Construction Contracts (England and Wales) Exclusion Order 1998. Most notably this order excludes top-tier PFI agreements and certain development agreements.
More controversial are the exclusions at s.105(2), particularly the exclusions relating to power generation. Critics have accused these provisions as being arbitrary and they are a regular theme in litigation.
Another point often debated is whether certain ancillary documents, such as collateral warranties or settlement agreements are construction contracts. The former was the subject of the recent case Toppan Holdings Ltd and another v Simply Construct (UK) LLP and looks something set to rumble on.
Parties are also free to contract to allow for adjudication to apply. PFI agreements, for example, regularly adopt adjudication (or something very similar) as its dispute resolution procedure.
The Construction Act also sets out how construction contracts should provide for the conduct of an adjudication. A construction contract must include provisions (among others) that:
- Enable either party to issue a notice of its intention to refer a dispute to adjudication at any time;
- Provide a timetable that allows the adjudicator’s appointment, and the issue of a referral (akin to a particulars of claim) within 7 days of the notice;
- Require the adjudicator reach a decision within 28 days of the referral (or a longer period to be agreed);
- Allows the adjudicator to extend their deadline by 14 days, with the consent of the referring party;
- Requires the adjudicator to act impartially; and
- Enables the adjudicator to “take the initiative” in determining the facts and the law.
If a contract does not incorporate all of these necessary provisions then Part I of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (amended by 2011 Regulations and supplemented by Regulations specific to Scottish contracts), more commonly known as the Scheme, shall apply. It is an ‘all or nothing’ approach.
Aside from incorporating the more general provisions above, the Scheme also implies some more detailed provisions (such as the nature of the notice and the referral) on the conduct of an adjudication.
With us now for over 25 years, adjudication and its rough justice is here to stay. It is by no means faultless and the growing complexity of disputes may put it under increasing strain. Nonetheless, it is popular, particularly among contractors, and has been replicated in many other legal systems around the world. For those involved in construction, it is essential to get to grips with the basics of adjudication. Tune in for the remainder of our adjudication 101 series that will cover (among others):
- Commencing an adjudication (notice, appointment and the referral);
- The adjudication itself (adjudicator’s powers, directions and the response);
- The adjudicator’s decision (timescales, reasons and the slip rule);
- Enforcing the decision (role of the TCC and duty of natural justice)
Michael Comba is a Solicitor at Sharpe Pritchard LLP.
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