Adjudication in construction disputes: Good intentions gone wrong?

By Daniel Thomas, Head of Litigation

Adjudication was designed to be a speedier and cheaper means of resolving disputes than court proceedings. Court proceedings are thought to be a drawn out and expensive process, particularly when dealing with relatively straight forward but high value construction disputes that are often time pressured.

The “Housing Grants, Construction and Regeneration Act 1996” introduced a statutory right for parties to a construction contract to refer their disputes to an adjudicator. As a result, the parties can incorporate into their contracts that any dispute can be referred to an adjudicator for determination, and that the decision reached by an adjudicator is binding on the parties.

Adjudication – The potential pitfalls

Whilst adjudication (in comparison to court proceedings) has provided a flexible and cost-effective way of providing quick results in a time pressured environment, it has been accused of creating a “smash and grab” culture in construction disputes.

The phrase “smash and grab” adjudication has been used to describe adjudications where an interim payment certificate has been issued by the contractor but for whatever reason has not been paid by the employer, and the matter has been referred to adjudication by the contractor for the full amount of the interim payment certificate solely on the basis that there has been no valid pay less notice served, or a default payment notice provided by the employer.

In reality, however, interim payment certificates can be highly contentious and more often than not require detailed analysis. The interim payment certificate can be inaccurate and not reflective of the actual value of the work done by the contractor at the time it is issued, or there can be other factors that come into play such as termination.

Theoretically, this means that, in circumstances where the parties have agreed to an indefinite right to adjudicate in relation to any dispute, the failure by the employer to issue a pay less notice or default notice in the face of an interim payment certificate will  give rise to the contractor’s right to adjudicate for payment confined specifically to the interim payment certificate, regardless of whether the true value of the work done is significantly lower or there or there is a set-off situation.

The first course of action for an employer is deemed to be to pay the interim payment certificate regardless of whether it is disputed or not, regardless of the contractor’s conduct and regardless of any other circumstances resulting in the non-payment and then argue the return of that payment after the event. This inevitably goes against the spirit of the Civil Procedure Rules and, in particular, the overriding objective, and seemingly dispenses of the requirement to be commercially-minded and engage in genuine attempts to settle the dispute.

The Courts have taken the position that the employer can bring a second adjudication and/or court proceedings to determine the true value of the works, and so then a parallel process ensues adding further costs and risk to the matter. This is coupled with the incredibly tight timeframes for preparation of the parties’ position which puts the opposing party in an extremely challenging position.

In recent case law, Grove Developments Ltd v S&T (UK) Limited [2018], the Court appeared to have more regard for the Civil Procedure Rules and it was held that an employer could start an adjudication to dispute the true value of the works for which the contractor claimed an interim payment regardless of whether the employer had failed to serve payment or pay less notice.

The decision in Grove Developments did come at a cost to both parties with two separate adjudications and part 8 proceedings issued. This surely begs the question of how this fits into the aim of adjudication being a “speedier and cheaper means of resolving construction disputes”? It’s certainly one for debate.

The issue appears to be further complicated in instances where the contractor terminates the contract, raising an interim payment certificate prior to termination but then delaying the submission of the final account for several months.

In these circumstances, the employer is left between ‘a rock and a hard place’ in terms of grounds to dispute the interim payment certificate. It appears they would have to accept that payment must be made or risk enforcement and bring a second adjudication and/or county court proceedings in respect of determining the true value of the termination account regardless of whether this has been received from the contractor/employer. A position which is entirely unsatisfactory to the employer!

Conclusion

It is clear is that adjudication, in its ‘one size fits all’ format, no longer seems the streamlined approach for construction disputes that it set out to be.

In comparison, Court proceedings give the parties a platform to set out their position, and the circumstances giving rise to the dispute and allow for reasonableness in a range of potential construction claims.

Parties should be wary of incorporating an indefinite right to adjudicate in any contract without first obtaining full advice. In most circumstances, Court proceedings or other alternative dispute resolution should be explored fully by both parties.