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Bigger and better adjudication for all?

This year marks the tenth anniversary of the coming into force of the Housing Grants, Construction and Regeneration Act 1996, more commonly known as the Construction Act. The Act, born out of a desire to improve cash flow in an industry notorious for its obstructiveness, particularly in times of recession, introduced the radical concept of statutory adjudication. Under the Act a party to a construction contract, the terms of which are recorded in writing, was given the right to refer a dispute, whether concerning payment or otherwise, to an adjudicator, who was obliged to make a decision on that dispute within 28 days. The decision, for better or for worse, is then binding on the parties until subsequently overturned by litigation or arbitration proceedings. The Courts, as a whole, have been reluctant to interfere with such decisions.

The Act has been a success. It has achieved its objective of speeding up cash flow. Parties who have their paperwork in order can now obtain payment from a recalcitrant client within two months, as opposed to possibly two years which it may have taken before the Act. Moreover, this can be done at relatively low cost. For example, we have recently acted on behalf of one client, a sub contractor, who was owed approximately £80,000 by the main contractor. The contract was in writing, and there was no good reason for non payment, with the result that we commenced the adjudication proceedings on behalf of our client. Within one month the adjudicator had decided that the client was entitled to receive 100% of the amount they claimed, plus interest. This was accomplished at a cost to our client of approximately £3,500 including the adjudicator’s fees.

Where the Act has been less successful is in generating a whole series of collateral disputes concerning issues such as whether the construction contract is in writing, or whether an adjudicator has the power to reach the decision he did. Further, the procedure has been used to try and resolve complicated, heavyweight disputes for which it was never intended.

As a result of the experience gained over the last ten years the Government has indicated an intention to amend the Act. It has published a draft Construction Contracts Bill, which has been made available for comment over the summer. The Bill in either its current form or amended in light of any comments received, is likely to come before Parliament and into force next year. The main changes proposed by the Bill are:

• Construction Contracts would no longer need to be writing

The Act will now apply to all construction contracts, including those made either wholly or partly orally. On the face of it this is a very welcome change, as it should eliminate the current arguments about whether all the relevant terms of a contract were agreed in writing thus entitling a party to adjudicate. Such arguments are currently deployed by responding parties to try and defeat otherwise valid claims. The downside of the change is that it will open up the way for argument about what precisely was agreed orally, probably necessitating the parties producing extensive witness statements and possibly the cross examination of those witnesses by the adjudicator and the parties. But there is an easy answer – make sure you sign an all embracing written contract so that there is little or no scope for any argument about its terms.

• Agreement as to the costs of adjudication would not be enforceable

At present the parties can agree in their contract who will bear the cost of any future adjudication. Thus, a dominant employer or main contractor, may stipulate in their contract terms that the other party is to pay, win or lose. This can affect the financial viability of commencing adjudication for many companies. Such clauses would be banned, unless agreed after an adjudication has started (when there will be less economic pressure on a party to agree to such a condition)

• Third party decisions would not be conclusive as to the amount of a periodic payment

Any provision in a contract that a third party interim payment decision, such as that made by the certifying architect or engineer, are binding and may not be challenged would now be ineffective.

• "Payment where certified" clauses would be banned

It would no longer be possible for a party, usually a main contractor, to delay payment until they themselves have had work certified for payment under their contract.

• Payment Notices could be issued by Payees

The Act requires a paying party to send to the payee a notice stating what will be paid. These are often known as Section 110 Notices, and they are widely ignored as there is no sanction for a failure to issue one. The Bill now envisages that, if the payer does not serve such a notice, then the payee may do so. The payer will then have to pay the sum set out in the notice unless he serves a valid counter notice in the event that he wishes to withhold some or all of the payment. It remains to be seen if this system, if implemented, would be an improvement on the current system. In any event parties will need to review their contract terms to ensure that they comply with the amended law.

It is too early to say which of these proposed reforms will be enacted, and in precisely what form. However, the proposals are to be welcomed. The evidence of the last ten years shows that adjudication works – the proposed changes can only make it work better.

If you would like to know more about bringing an adjudication claim then please contact contact Mark Jones on mark.jones@harveyingram.com or 0116 257 6133.