May 30, 2014 Articles

Construction Adjudication on the Rise Globally for Payment Disputes

The methods of resolving construction payment disputes seem as myriad as the disputes themselves

by John Madden

The methods of resolving construction payment disputes seem as myriad as the disputes themselves. In Ireland, the legislature last July enacted a law introducing a method of dispute resolution new to the Irish construction landscape—adjudication.

The motivation behind the Construction Contracts Act 2013 was to create payment protection for those who provide labor and materials for a project (as there is no mechanic’s lien in Ireland). The Act introduces two mechanisms to achieve this: (1) new 30-day “must make payment” provisions and (2) a right to refer payment disputes to rapid-fire adjudication.

Adjudication

Adjudication is a dispute resolution process in which an independent neutral, an adjudicator, is appointed to render a decision on payment issues within 28 days (with very limited exception) of referral. If compliance is not met voluntarily, the decision of the adjudicator is enforceable at court by summary judgement.

Ireland took inspiration from the U.K., which introduced adjudication for construction disputes in its Housing Grants, Construction, and Regeneration Act 1996 (Part 2), with amendments as recent as the Construction Act 2009. Adjudication has become the go-to process for dispute resolution in the U.K., greatly curtailing the use of lengthy processes such as arbitration. According to a Scottish university study, in the 14 years between 1998 and 2012, the use of adjudication rose from 187 in its first year to 1309 in its second year. This rise continued for a few years, then began to fluctuate. In 2013 there were 1083 referrals to adjudication. The success of adjudication in the U.K. has been aided by the use of a specialist court, the Technology and Construction Court (TCC), which promptly (within days of application) and consistently (but not always) enforces adjudicators’ decisions.

Adjudication in construction disputes is not limited to the U.K. and Ireland. In Australia, governments in five states introduced statutory adjudication between 1999 and 2004. The legislation differs from state to state, but all carry similar methods to create a speedy process, ensuring prompt and regular payment for subcontractors and contractors under construction contracts. Statutory adjudication is also provided for in New Zealand under the Construction Contracts Act 2002, which enables parties to refer a dispute to adjudication. Elsewhere, Singapore introduced statutory adjudication in 2005 with the enactment of The Building and Construction Industry Security of Payment Act, and as recently as 2012 Malaysia enacted the Construction Industry Payment and Adjudication Act 2012 (English Translation), which came into force on June 22, 2012, and into operation effective April 15, 2014. According to reports, the Hong Kong government is currently considering the introduction of statutory adjudication as it is currently a voluntary dispute resolution mechanism provided for in contracts.

Adjudication is still relatively unknown in the U.S. However, the State of Texas attempted to enact a bill introducing construction adjudication in 2003. The bill described adjudication as “a non-binding but temporarily dispositive contract mechanism for preventing and resolving disputes . . . .” The bill called for every contract to contain a provision that “adjudication was considered” and, as in Ireland and the U.K., required the adjudicator to reach a decision within 28 days. Although this bill did not become law, clearly some U.S. lawmakers see the benefits of instituting an adjudication process.

Adjudication Process under the Irish 2013 Act

In Ireland, the Construction Contracts Act 2013 (the 2013 Act) was enacted on July 29, 2013, and the date of commencement is expected imminently. Unlike the U.K., the Irish legislature has chosen to limit the scope of adjudication to payment disputes only. It remains to be seen how the adjudication process will be handled by parties, adjudicators, and the courts. At present, there is no specialist construction court or specialist judge established; however, it is anticipated that enforcement proceedings through the Irish judicial system will not curtail the benefits of adjudication.

The statutory right to refer payment disputes to adjudication provides that “[t]he party may exercise the right by serving on the other . . . party to the construction contract at any time notice of intention to refer the payment dispute for adjudication.” (emphasis added) Once the notice of intention to refer is given, the parties have five days either to appoint an adjudicator or seek an appointment from a panel of adjudicators established by the Minister. The referring party has a further seven days to refer the dispute to the adjudicator with supporting documents, and the responding party is given a brief opportunity to reply. The adjudicator is required to make a decision within 28 days from the day on which referral is made but has discretion to extend the 28-day period by 14 days with the consent of the referring party. The parties may also agree on a longer period for the adjudicator to reach a decision after the referral has been made.

Adjudication is not without potential problems. There has been some criticism that the inclusion of the phrase “at any time” may allow the referring party to “ambush” the other party by taking time getting its claim together, unbeknownst to the other party, and then trigger the short adjudication period. For the process to work best, adjudicators need to carefully manage parties’ expectations.

The Adjudicator’s Decision

The adjudicator’s decision is “binding until the payment dispute is finally settled by the parties” and is immediately enforceable, unless and until disturbed by arbitration or court proceedings. The Act provides that the parties shall bear their own legal and adjudication costs and that the fees and costs of the adjudicator are determined in accordance with the adjudicator’s decision.

Lessons can be learned from the U.K. experience where the courts have been supportive of the adjudication process. Generally speaking, to successfully challenge a U.K. adjudicator’s decision, one must demonstrate noncompliance with the statute, lack of jurisdiction, or disregard for “natural justice” in terms of procedure. In the U.K. case, Herbosch-kiere Marine Contractors Limited –v– Dover Harbour Board [2012] EWHC 84 (TCC)),the court determined that the adjudicator had gone off on a “frolic of his own” in using an assessment method that had not been advanced by either party and the challenge was successful. Another example where an adjudicator’s actions led to a decision being overturned is found in ABB Ltd v Bam Nuttall Ltd. [2013] EWHC 1983 (TCC),where the adjudicator used a clause within the contract that answered the question in dispute completely, but he did not give the parties an opportunity to comment on the efficacy of the clause. According to a Scottish University study, of 22,000 adjudications since 1998 there have been just 520 reported cases before the U.K. courts that challenged enforcement.

Adjudication and Other Dispute Resolution Processes

Not surprisingly, the use of arbitration in the U.K. has fallen off since the introduction of statutory adjudication. In Ireland, the decision of the adjudicator shall be binding until the payment dispute is finally settled by the parties; or when a different decision is reached on the reference of the payment dispute to arbitration or in proceedings initiated in a court in relation to the adjudicator’s decision. It is likely that once this act commences, the use of arbitration will also diminish in Ireland.

Mediation is likely to remain a viable option as the threat of adjudication with its attendant risks may prompt parties to want to mediate their dispute. In February 2002, four years after the inception of adjudication in the U.K., the Centre for Effective Dispute Resolution (CEDR) reported that the number of CEDR Solve mediations remained stable during the previous two years despite the high number of adjudications during that time.

Conclusion

Adjudication is a fast form of “rough justice” that has the benefit of protecting subcontractors and prime contractors from losing payment for work performed while a project is ongoing. In Ireland, those in the construction industry are now preparing to put in place the contractual and administrative mechanisms to deal with the 28-day speed of adjudication.

If statutory adjudication continues to gain recognition around the globe, those in the U.S. construction industry, particularly the subcontractor trade associations, may want to promote adjudication legislation.

John Madden is a civil engineer/attorney with Madden Mediation & Arbitration Limited, with offices in New York, New York, and Dublin, Ireland.

 

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