Legal commentary: Adjudication proposals: good or bad?
The process of adjudication was introduced by The Housing Grants, Construction and Regeneration Act 1996 with the aim of reducing the number of construction and engineering disputes that end up in litigation or arbitration. It is now the standard method of resolving differences between parties to a construction contract and, put simply, means parties can agree the terms of the construction contract provided that they are consistent with the mandatory provisions of the Act.
Before the introduction of the Act, those involved in construction contracts were forced to resort to litigation or arbitration, both expensive and time-consuming processes. Adjudication came as a relatively inexpensive solution and allowed for work to continue while disputes are being resolved. The whole process thus far has worked fairly well
Three proposals
On 20 June, however, the government announced three proposals to improve access to the right to refer disputes for adjudication. But there are concerns that the changes outlined could defeat the primary purpose of the Act.
First, it suggested applying the legislation to 'oral' and 'partly oral' contracts. Second, it suggested preventing the use of an agreement that interim payment decisions are not open to challenge - a situation that has been used in the past to prevent adjudication on interim payments. Third, it stressed the importance of ensuring the costs involved in the process are fairly allocated.
A principal aim of adjudication is to try to keep payments flowing under a building contract and not to determine the terms of a building contract. Therefore, allowing adjudication on verbal contracts is essentially a bad idea. Assessing the validity of evidence will require proper witness evidence as to the terms of the contract, which would need to be tested by questioning. Without the requirement for the inclusion of a statement of truth, and the sanction for telling untruths, some very spurious claims could be anticipated.
Similarly, allowing adjudication on verbal contracts could raise costs as it would probably be necessary to have a hearing to test the evidence. In conjunction with that, as an adjudicator is unlikely to be the most qualified person to determine the terms of a contract where one does not exist in writing, or is not evidenced in writing, the process may take longer and become more akin to arbitration, thus defeating its original purpose.
As to clauses which provide that interim decisions are conclusive and which arguably prevent adjudication on interim payments, there is a view that the government's proposals interfere too much with the freedom of the parties to agree the terms of their own contracts. The reason sometimes given for introducing such clauses is that adjudication on interim payments leads to unnecessary disputes when ultimately interim payment decisions can be corrected in subsequent payment applications or at final account stage. Provided the final account can be adjudicated, the argument runs that the contractor is not denied the statutory right to adjudication.
Negating purpose of adjudication
However, one of the main purposes of adjudication was to improve cash flow and prevent small contractors going out of business. Clauses that limit the right to adjudication therefore strike at the heart of what adjudication was supposed to be about. Accordingly, there may be some merit in what is being proposed by the government in this regard.
In terms of costs, at present the only ability of the adjudicator is to award his own costs. If adjudicators were to award costs generally, it could encourage more claims for smaller amounts. Again, it could undermine the purpose of the process by slowing what was meant to be a quick, cost-effective resolution procedure of the issue only. Similarly, such a measure could leave the process open to being hijacked by some parties, as can happen in litigation. In the event of hijacking, the bigger, wealthier party puts pressure on a smaller, less wealthy party by making costs a risk as well as the payment in dispute. One small consolation is that the measure may discourage spurious claims and put off smaller subcontractors that might fear losing an adjudication and being responsible for costs.
The government has stated that the proposed amendments will seek to improve transparency and clarity in the exchange of information relating to payments between parties to construction contracts, enabling them to manage cash flow better and to encourage parties to resolve disputes by adjudication. However, if enacted, all three measures could undermine the original aims and benefits of the adjudication process and so could mean the process would become akin to arbitration or litigation and be of little benefit to the parties.