Your browser is no longer supported

For the best possible experience using our website we recommend you upgrade to the newest version of your browser.

Your browser appears to have cookies disabled. For the best experience of Construction News, please enable cookies in your browser.

Welcome to the Construction News site. As we have relaunched, you will have to sign in once now and agree for us to use cookies, so you won't need to log in each time you visit our site.
Learn more

Reforming adjudication

Proposals for the reform of the Construction Act could add to the costs of adjudication, but the removal of the requirement for a written contract is a good move, argues Rudi Klein

In a recent column I discussed the Government’s proposals for amending the payment provisions in the Construction Act.

Those proposals were contained in a second consultation document published at the end of June. It contained changes to the adjudication process.

It is worth taking stock of where we are with adjudication. According to Glasgow Caledonian University’s Adjudication Reporting Centre, almost half of all adjudications involve disputes worth £50,000 or less.

A survey of adjudicators by the DTI (now the Department for Business, Enterprise and Regulatory Reform) and the Construction Industry Council indicated that, per dispute referred, the total of the parties’ legal costs and the adjudicator’s fees and expenses came to £20,000.

Hence 40 per cent of the value of a dispute submitted to adjudication is taken up in costs. Adjudication is only intended to provide a ‘stop-gap’ decision, so this hardly represents value for money.

The feedback I receive, especially from small to medium sized enterprises, includes a consistent message: because of the costs involved, adjudication is becoming less accessible.

This is compounded by onerous provisions, especially the notorious provision that requires a referring party to pay all the costs of the adjudication – including the adjudicator’s fees and costs – irrespective of whether that party had won or lost the decision.

To rub salt into the wound, such clauses often require the referring party to meet the other side’s costs on an indemnity basis – that is, pay all the other side’s legal costs irrespective of whether they were reasonably necessary to the actual conduct of the adjudication.

In addition, there are provisions that require the referring party to place a sum – sometimes as much as £10,000 – into a specified account by way of “security for costs”.

Winner takes all

The idea that a ‘losing’ party should pay a ‘winning’ party’s costs in adjudication is nonsensical. Those who advocate it simply do not understand the concept of adjudication.

Adjudication comes under the rubric of ‘pay now, argue later’ – it is a facility for keeping the cash moving. It is not arbitration or, indeed, litigation which, through the sifting and evaluation of evidence, seeks to find a winner and loser.

It is inappropriate that the adjudicator should have the power to require the ‘losing’ party to meet the cost of the ‘winning’ party.

DBERR is concerned about the issue of costs in adjudication and it is proposing a statutory framework to deal with this.

The aim is to “provide greater access to the adjudication process for those in the construction industry who would otherwise be reluctant to go through this process because of the costs involved”.

But DBERR does not intend to outlaw agreements that a referring party pay all or part of the other party’s adjudication costs. Instead, such agreements can be valid if made in writing after the appointment of the adjudicator.

Similarly, an agreement that the adjudicator can decide whether a party should pay all or part of the cost of the adjudication is valid if in writing and entered into after the adjudicator’s appointment.
These proposals undermine adjudication. It would be simple to attach an agreement to every contract and require the other party to sign it following the appointment of an adjudicator.

If a party has an ongoing relationship with the other party, or hopes to get work from them in the future, it will be very difficult for that party to refuse to sign such an agreement.

DBERR's proposals

DBERR proposes to outlaw contract clauses stating that decisions as to the amount of interim payments will be “conclusive”. I can see the types of scams that will be used to get around this ban. I would simply make my decisions as to “all interim valuations” – rather than interim payments – final and conclusive.

But DBERR also proposes that the parties may agree the payer’s decision is conclusive of the amount of the interim payment due after the decision amount has been notified. But they could do this anyway.

This proposal will not affect the final payments. There are thousands of construction contracts where there is only one payment – the final payment. It seems that by inference, all other clauses making decisions on matters other than payment (such as extensions of time) are acceptable – even though they prevent an aggrieved party going to adjudication.

How does all this accord with section 108 of the Act, which provides a statutory right to go to adjudication to deal with “a dispute arising on the contract”? Sanctioning clauses that make decisions as to final payment or, indeed, any other matter final and conclusive makes a mockery of section 108.
The best thing on offer from DBERR is the removal of the requirement that in order to enjoy the protection of the Act the contract must be in writing. The courts have interpreted this as meaning that everything agreed between the parties has to be written down.

But people have been coming to adjudication arguing that the contract was not wholly reduced to writing – the parties had forgotten to record some minor matter.

As a result, it would be argued, the adjudicator did not have any jurisdiction. DBERR’s decision to scrap this requirement will help reduce the unending challenges to the jurisdiction of the adjudicator.
The perception of adjudication among many firms is that it is becoming more and more expensive. But DBERRs proposals, far from reducing the costs of adjudication, could actually put them up.

There are two reforms that would have helped in this regard. The first is a single adjudication procedure that would be mandatory for all adjudications, thus removing all bespoke adjudication procedures that are, after all, primarily aimed at getting around the Act.

The second is an extension of the adjudicator’s powers to reduce challenges to his jurisdiction, which add substantially to costs.

For example, the adjudicator should be able to decide whether or not there was a dispute. It is often argued that the adjudicator does not have jurisdiction because there is no dispute. As a result the matter has to be determined by the court.

Let’s hope an opportunity for reinforcing the adjudication process – as originally conceived – has not been lost.

KEY POINTS

  • Adjudication is becoming more and more expensive.

  • Agreements that the referring party should pay all or part of the other party’s adjudication costs should be outlawed.

  • Outlawing clauses stating that decisions as to the amount of interim payments will be conclusive will have no benefit.

  • The only positive DBERR proposal is the removal of the requirement for contracts to be in writing.