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Adjudication: Housing Grants, Construction and Regeneration Act 1996

By Tony Francis
Special edition of the Construction Industry Law Letter
1998

This special edition of CILL deals solely with adjudication following the commencement of Part II of the Housing Grants, Construction and Regeneration Act 1996 and the introduction of a statutory right for a party to a construction contract to insist upon the adjudication of a dispute.

One of the main recommendations of the Latham Report was that adjudication should become the normal method for settling disputes in the construction industry. It is still far too early to be able to express any reliable prediction as to how successful adjudication will be in achieving this objective. However, this special edition contains a number of articles from individuals involved in one way or another in the construction industry and its legal processes. It is interesting to note that the majority of these authors express real pessimism as to adjudication reducing the number of disputes within the industry and thus becoming key in resolving disputes. Significantly, there are those within the construction industry and amongst legal practitioners who think that the statutory right to adjudication could of itself lead to an increase in the number of disputes that go to arbitration or litigation.

Certainly, there are areas of the adjudication process itself, such as a role of the adjudicator and enforcement, that will inevitably generate a number of disputes until case law or legislative change address such issues. In particular, the Act has been criticised for not adequately addressing the vital question of enforcement which is discussed within this special edition.

An important question is how parties will react in the face of adverse adjudicators’ decision and how parties will actually use the right to adjudication. If a party feels a real sense of injustice in relation to an adjudicator’s decision, which is a very real possibility given the fast track nature of the adjudication procedure, subsequent arbitration or litigation after practical completion is not unlikely. This is particularly so in situations of adjudication by ambush. Whilst there may well be a very real temptation for a party and its advisors to indulge in such tactics for the purpose of short term commercial advantage, will such conduct really bring long term gain? Where one party has been on the receiving end of adjudication by ambush this is likely to lead to a deterioration in relations between the parties to a dispute. If this cooling relation is combined with any dissatisfaction with the adjudicator’s decision litigation or arbitration would seem highly likely and the prospects for amicable settlement remote.

Further, the success of adjudication may depend upon the manner in which it is used by parties and for what types of disputes. The traditional view has that where an issue of set-off arises in relation to a discrete item of defective work or an issue as to quantities and rates in respect of payment arises then adjudication may well provide the ideal solution, but that adjudication is not suitable for a complex delay and disruption claim. In this situation the scenario outlined above in relation to dissatisfaction with the adjudicator’s decision is more likely to occur. But ironically, it is in precisely those complex loss and expense cases, where the evil of excessive legal cost is at its most acute, that the parties need to find a more economical way to resolve their disputes. If adjudication fails to deliver acceptable results in this area, parties are likely to fall back on their long-establish traditions of trial-by-ordeal and horse deal.

One thing is certain: adjudication will not be a complete and permanent fix. A law of supply and demand always applies: if adjudication starts to provide a quick and effective means for claimants to obtain redress, then more and more claimants will think it worthwhile to commence less and less meritorious claims. For all its inefficiency, the present court and arbitration system does at least discourage parties from making claims.

As to the manner in which the parties use adjudication only time will tell. Unless there is a willingness on the part of the construction industry to use adjudication in the manner intended by the Latham Report as a process the industry will rapidly lose faith in adjudication. It is instructive to note that certain large contractors and clients have drafted adjudication clauses designed to prevent any payment of monies in compliance with the adjudicator’s decision until after practical completion. Whilst such clauses may comply with the Act, they are certainly contrary to its spirit. This in itself is a clear indication that much time and effort has already been spent and will no doubt continue to be spent on ways of nullifying the intent of the Act. This does not bode well for the future of adjudication.

For all these uncertainties, however, adjudication surely deserves a welcome. The current system, whereby contractors and subcontractors can be kept out of their money for long periods of time, is bad for the construction industry. And it surely a tragic waste of the talent of construction lawyers that they devote so much of their time and their clients money on hugely wasteful adversarial systems instead of delivering fast, affordable and fair dispute resolution.

Two considerations may help to make adjudication succeed. First, there is the consideration of cost. Early indications are that adjudication typically costs less than 10% of the cost of litigation or arbitration. It needs to stay that way, or adjudication will drift towards to no more that a casual version of arbitration. Rough justice that is affordable has great advantages, but rough justice that is expensive does not.

Secondly, adjudicators will do well to learn at least some of the lessons of ADR. Typically, ADR neutrals are trained in the techniques for recognising and coping with the dynamics of dispute, and the success rate for non-binding processes in the construction industry seems to be high - a little over 80%. If adjudicators can so structure their processes such as to apply those techniques, and if both parties can be made to feel that they have had a fair hearing, then there is reason to hope that adjudications will work, and that within a few years we will all wonder how we managed without it for so long.

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