This is the first, introductory, article of five on making construction adjudication work effectively. Further articles will published on each of the following four Tuesday mornings:
- starting the process
- appointing an adjudicator
- drafting and submitting the claim, response, reply and rejoinder
- dealing with witnesses and experts
The purpose of these articles is to explain the adjudication process, and to assist contractors and owners, and their advisors, to make the most of the process. More information, case discussions and commentary can be found on my website - johnwalton.co.nz
Tiered dispute resolution
Hong Kong's Route 3 Interchange (pictured above) was one of the Airport Core Programme (ACP) projects, announced by the Governor of Hong Kong in the early 1990s in an effort to stabilise the economy and to calm fears over the hand-over to the People's Republic of China in 1997. I was a member of a team of three, advising the Hong Kong Government on construction aspects of the ACP projects; we drafted the pre-qualification, tender and contract documents for all 70 of the USD 20 billion ACP projects, and advised on project delivery and on dispute avoidance.
The dispute resolution provisions in those contracts were tiered and complex, with provision for Engineer's determination, mediation, adjudication (for payment disputes) and arbitration. In practice, the ACP projects were lauded by Transparency International for the lack of corruption and the relatively disputes free processes. Most of this was due to the proactive project management by Bechtel International and advice from the Attorney-General's Chambers; and the fact that potential disputes were identified early and dealt with promptly.
For all its benefits, arbitration was used rarely.
My experience in New Zealand, since returning in 1995, has been that the commonly used multi-tiered disputes clauses are rarely effective for dispute avoidance in the construction industry. The Engineer is typically central to any disputes (their reviews are almost always over decisions that they have made themselves), and once a dispute has matured the client or contractor has little interest in going back through the notice, review, mediate, arbitrate procedures. They want to terminate and sue for their losses.
Sadly, by the time any contractual disputes processes are engaged, the only feasible option is arbitration; the parties' positions are entrenched, and the possibility of a successful project outcome all but gone. Why is this?
Part of the answer is cultural (we like to think of ourselves as fair-minded, good negotiators and conflict averse) and the rest reflects a lack of understanding of how to make disputes procedures work properly. Many in the industry do not understand the differences between mediation, arbitration and adjudication - they all involve lawyers, delay and cost ...
The first step, the formal Engineer's review, is generally prompt, informal and is provided by a person intimately involved in the project with an obligation to maintain professional independence, and a contractual obligation to be impartial.
Against these benefits, the Engineer is also the owner's agent; engaged, instructed and paid for by the owner. In this regard, the Engineer will usually have prepared the designs, drawings and specifications and will also have prepared the contract documents, given instructions on the owner's behalf, ruled on variations, determined extensions of time and made decisions on the owner's behalf throughout the construction process. Save in respect of a failure to pay, almost every dispute will turn on a decision of the Engineer. It is difficult to avoid the inevitable conclusion of conflict of interest.
This is often compounded by the lack of any procedural fairness or concept of natural justice in the Engineer's review.
The next step, mediation, is a consensual process in which the parties endeavour to reach an acceptable settlement of the dispute, with the involvement of a mediator, or negotiation facilitator. A core element of the mediator's traditional role is not to provide a decision, not to advise and not to evaluate. The mediator simply assists the parties to identify the issues, discuss their respective positions and to evaluate and hopefully agree a negotiated outcome. It is an interests based negotiation, rather than a rights based evaluation, and it is entirely voluntary.
Many mediators and legal advisors will counsel deferring mediation until at least discovery in any legal proceedings, or at least until legal positions formalised and the parties' cases understood. This is typically settlement negotiation, rather than dispute avoidance or resolution in a way which promotes successful project outcomes.
In practical terms, due to the sums involved, the representatives of the disputing parties in meditations rarely have full authority to realistically settle most construction disputes. They have either been given an unrealistically conservative basis on which to settle, guaranteeing the need to go back to their respective managers or boards of directors for authority; or they reserve their positions at the outset, requiring a final approval to any settlement.
At the senior management or board level, any settlement needs to be provided in context, whether the best or worst alternative to a negotiated agreement (BATNA or WATNA), and on the basis of legal advice as to the rights being surrendered.
Mediation inevitably involves compromise. For most infrastructure developers, it is less an issue of the sum of money to be paid in settlement, than understanding their legal obligations. In this context, determinative disputes procedures, applying legal analysis of rights, are generally preferred.
Mediation can be effective if used as an informal disputes board, with the appointment of a mediator experienced in construction disputes to ride shotgun on the project, identifying and, if possible, avoiding or resolving disputes as they arise. However, in a formal tiered disputes process, mediation is all too often just another step on the way to arbitration.
Once all preliminary procedures have been exhausted, the final forum for determining a dispute is in arbitration - a final and binding determination by an arbitrator, who manages the exchange of pleadings and evidence; conducts a hearing; and finally issues an award. Unlike mediation, this is a rights based determination with the arbitral tribunal considering legal argument, evidence and making a decision, based on established legal rules. In practical terms, most arbitrations are run like court hearings, with much of the time, cost and complexity that involves.
Over the almost two decades since adjudication was introduced, the benefits of the "speedy resolution of disputes" have largely materialised, with a number of speed bumps along the way.
In this series, I share my thoughts as an adjudicator on how to make the most of adjudication. This is a practical guide, given from the perspective of an adjudicator, rather than a summary of the current state of the law.
This first article explains what adjudication is, and why use it.
What is Adjudication?
Introduced in the Construction Contracts Act, adjudication came into effect on 1 April 2003.
The New Zealand Act followed similar legislation in the UK (Housing Grants, Construction and Regeneration Act) and in New South Wales (Building and Construction Industry Security of Payments Act), but with a number of significant and unique approaches.
First, adjudication applies to all construction contracts. If the contract is for construction work, then adjudication is available for any dispute under that contract. It does not apply just to the construction aspects of the work, but to any dispute under the contract.
Construction work is widely defined in section 6; it covers most building and construction activities and includes design and quantity surveying. Some exclusions are not so obvious, like project management and landscaping work which is not preliminary to traditional building work. The definition needs careful review in each case.
Second, is there, in fact, a dispute? Unlike the NSW legislation, the NZ Act is not limited to disputes over payment. Any disagreement, including rights and obligations under the contract (which extends to general damages claims), may be adjudicated. That disagreement has to have matured into a dispute, typically by a refusal to pay an amount due or to grant a variation or extension of time. It can then be referred to adjudication by either party (section 25). Adjudication is independent of any parallel disputes procedures (section 26).
To commence the process, a notice of adjudication can be issued by either party (section 28). The notice must:
- be dated
- identify the parties to the contract, and the contract itself
- state the nature and a brief description of the dispute
- provide details of where and when the dispute arose
- state the relief or remedy sought
- and confirm whether or not a charging order is required
The notice itself must then be accompanied by a statement in Form 2, attached to the Construction Contracts Regulations 2003.
The parties can then agree an adjudicator to determine the dispute, failing which the claimant may apply to an authorised nominating authority to make the appointment on their behalf (section 33).
Once the adjudicator has been appointed (section 35), the claimant has five working days within which to submit its claim (section 36), the respondent has a further five working days to submit its response (section 37), the parties may then submit a reply and rejoinder (section 37A) and the adjudicator then has 20 working days to complete a determinationof the dispute (section 46). In all, once the notice has been issued, subject to any extensions, the entire process provides for the determination of disputes within six weeks.
Once issued, the determination is binding on the parties, but not final (section 58). In practical terms, this means that the parties can either live with the result, or refer the matter to arbitration; or in rare occasions to court, where the dispute is heard afresh. The arbitrator or judge is not bound by the findings of the adjudicator, and must hear all evidence and consider submissions from scratch.
With the choices of mediation, arbitration, or court where arbitration has not been selected, why go to adjudication? It can be expensive, and the outcome uncertain.
Adjudication sits outside the tiered contract provisions discussed above - it is mandatory. It is not possible to contract out of adjudication under the Act (section 12), and once initiated the respondent cannot realistically avoid the process. If the respondent does not participate, there is a significant risk that it will have a binding determination made against it.
If run effectively, adjudication can be prompt and durable. It provides the opportunity to refer defined contract disagreements to an expert to provide a prompt, binding determination, which in most cases will provide a solution to the disagreement before the parties' positions become entrenched and the dispute matured to a point where construction is adversely impacted.
Most construction contracts are for medium to long term projects, with considerable uncertainties (as to price, quality and delivery), and they are heavily reliant on the quality of relationships at a project level, if those projects are to be successful. Disagreement of some form is almost inevitable. How those disagreements are dealt with can make all the difference.
For most relatively minor disagreements, a mediated settlement, with some level of compromise, will be the most effective means of resolution if undertaken early.
For more significant disagreement, most project managers need some level of justification for any departure from what will become an entrenched position. Adjudication can provide that justification before the disagreement starts to impact on the works, and it can also resolve disagreement on ongoing contract issues, like extensions of time and variations, at a time where it gives the parties a productive way forward.
This, of course, assumes that the parties identify the dispute at a time where it causes the least disruption and adverse impact on project relationships; and that they confine the dispute to the issues which need to be resolved. If they then present their cases rationally and effectively, a durable outcome is more likely.
In terms of time and cost, adjudication has no provision for formal discovery, evidential hearings (with the taking of sworn evidence and cross-examination) or any of the other procedural niceties of the more formal procedures like arbitration or litigation in court. Provided, of course, that the parties' submissions are focussed on the specific issues of disagreement and the procedure is used to find a durable solution, rather than pouring fuel on what can be an already difficult relationship.
Once determined, the parties bear their own legal costs (section 56); the adjudicator's fees are shared equally between the parties (section 57); construction work may be suspended (section 24A); the successful party can have the determination entered and enforced as a judgment of the court (section 58); approval for a charging order may be given (section 49); and the proceedings are confidential (section 68).
This can all be achieved promptly and cost effectively, when compared to the alternatives of detailed litigation (whether in court or arbitration). In this context, adjudication is often referred to as "quick and dirty", consistent with the "pay now-argue later" ethos of the Act. This is perhaps unfair, and not reflective of what adjudication can achieve. However, if a determination is considered to be defective, it is always open to the parties to refer the dispute to be considered anew in arbitration or court, depending on what has been agreed.
While mediation and arbitration have their places in the construction industry, adjudication also has a valuable place, to provide prompt and effective determination of disputes, if used effectively.
There has been some, justified, criticism of adjudication over the almost 20 years since it was first introduced. In the UK, the truncated procedures were described as brutal; in Australia, the concept of referring disputes wider than payment viewed with alarm. In NZ, many have commented about the variability of adjudicators; the legal, and in some cases adjudicator, costs of the process; and the quality of the determinations. It is the purpose of this series of articles to address those concerns and to provide some guidance on making the most of the adjudication process.
Next week I will cover defining the dispute and starting the process. Ultimately, the thoughts (and errors) in these articles are my own. My intention is to broaden the use of adjudication, and to make its use more effective.