This is the second article of five on making construction adjudication work. In this instalment I look at defining the dispute, and initiating the adjudication process.
Construction projects do not fall into the usual vendor-purchaser transactions. The design of the works is increasingly incomplete, external factors which impact on cost and quality cannot be controlled, and the timing of delivery is rarely certain. Most owners want to know what they're getting, for a predictable price and time of delivery. Few are certain, and that uncertainty brings the potential for disagreement.
The seeds for disagreement are frequently laid at tender. Increasingly, tender designs are insufficient to price; ground condition and other externalities aren't identified or investigated; and supply details not capable of specification. Contractors, in a competitive pricing process, are left in a difficult position. They either price for generic designs, on the basis that any departure from what they might have priced for is a variation; or tag their prices and include contingencies; or, more frequently, a mix of both. Whatever approach is adopted, tenderers are being required to provide fixed prices for aspects of the work which are uncertain and beyond their control, with limited transparency.
Construction contracts must therefore provide an allocate risk and responsibility, and a framework to deal with those uncertainties. The first sep is agreement. Where cost increase and delay are involved, agreement can be problematic. A circuit breaker is then required, first in the form of the Engineer, followed by consensual then determinative processes.
Disagreement leading to dispute
The typical progression of disputes is the contractor notifying a claim; formally raising the claim for additional payment and time with the progress payments; and negotiation with the Engineer.
If the claim is not settled, there is then a choice of escalating through the dispute resolution route outlined in the contract, or short circuiting those procedures and going directly to adjudication under the Construction Contracts Act. As outlined in the first article in this series, arbitration is probably best suited to major disputes which have matured, and the work is finished or the contract terminated; disputes where the “speedy resolution” referred to in section 3 of the Act is not as compelling as getting a considered and final result.
Adjudication, conversely, has the advantage of being available at any time, and giving the parties the opportunity to present their cases for prompt decision in the form of a binding, but not final, opinion. Adjudication, therefore, tends to be well suited to discrete issues raised early in the construction process.
Defining the dispute
There is an argument that adjudication has become over-lawyered, with documentation and submissions increasing in length, and legal costs matching those for arbitration. There is some truth in this, and it is perhaps understandable, if lamentable.
There is nothing “speedy” about receiving over 20 Eastlight folders of contract documentation and correspondence, accompanied by extensive submissions, covering an unnecessary number of issues and allegations and numerous witness statements, complete with jurisdictional challenges.
If adjudication is to be effective, parties must resist the temptation to throw every issue, argument and allegation, including bad faith, at the dispute in the hope that some of it sticks. Adjudication is best suited to defined issues which go to the heart of the particular dispute. This will frequently be whether or not a particular condition or event was unforeseen, or if an instruction or event is properly a variation, or caused delay.
Those issues alone can be complex, and the sooner the issue is properly defined, the more likely it will be that a durable determination will ensue and the project will continue to completion with the least distraction and diversion of resources.
Prior to the 2015 amendments to the Act, there was a distinction between the enforceability of adjudications over payment and those relating to rights and obligations. That distinction has been removed. All disputes, whether for payment or rights and obligations, can be determined at adjudication, and are equally enforceable.
One issue which is frequently overlooked is that adjudication under the Construction Contracts Act is available for breaches of the implied warranties in the Building Act 2004, including those which apply to subsequent owners (section 362J of the Building Act).
Initiating the adjudication procedure
As mentioned in the first instalment of this series, adjudication is available to any party to a construction contract, and is not time limited in the Act (section 25).
The first step is to issue a notice of adjudication (section 28). The formal requirements are few, also outlined in the first article in this series:
· the date of the notice:
· the nature and a brief description of the dispute and of the parties involved:
· details of where and when the dispute arose:
· the relief or remedy that is sought:
· whether approval for the issue of a charging order under section 29 is being sought:
· whether a determination of an owner’s liability under section 30(a) and an approval for the issue of a charging order under section 30(b) are being sought:
· details sufficient to identify the construction contract to which the dispute relates, including the names and addresses of the parties to the contract; and if available, the addresses that the parties have specified for the service of notices.
The notice must also be accompanied by a statement of rights and obligations and an explanation of the adjudication procedure in Form 2, set out in Schedule 1 of the Construction Contracts Regulations 2003. While there is some flexibility in relation to non-compliances with the requirements for the notice, if Form 2 is not attached, the notice of adjudication is of no effect (section 31A), and the process must be started again.
The notice must indicate whether or not approval for a charging order is being sought, whether over the construction site owned by the employer under the contract (section 29), or owned by an Associate (section 30).
Much like the Wage Earners’ and Contractors’ Liens of old, charging orders restrict the ability of the owners of site from dealing with the land (typically through sale) without paying any outstanding debts owed to contractors. Uniquely, the Act allows adjudicators to grant approval for the issue of charging orders where liability to pay a sum is established.
Where the construction site is owned by an “associate” of the owner, for example a company or investment trust, then the power to approve the issue of a charging order can extend to that site also. Prior to issuing the notice of adjudication, it pays to search the title to the construction site and to investigate any related ownership.
Preparing the notice
There has been some discussion and debate over the extent to which a notice of adjudication sets the jurisdiction of the adjudicator. Certainly, there can be no doubt that it defines the dispute, but it is far from clear whether or not it is determinative – the formal claim may be accompanied by the notice, to the extent it remains relevant (section 36) and in determining the dispute, the adjudicator must take account of the Act, the construction contract, the submissions of the parties, witness evidence, an site inspection and any other matter the adjudicator considers relevant (section 45).
It is clear that the notice must define the dispute, and any claim must fall within what is covered by the notice. The purpose of the notice is clearly to advise the respondent of the broad detail of the dispute and what is claimed. Once that has been done, then it ceases to be relevant. If the claim deviates from the notice, in a way which it could fairly be said was not brought to the respondent’s attention, then there is clearly a problem.
This has led to the practise of preparing the claim first, and then cutting and pasting the relevant text from the draft claim into the notice. This can result in unnecessarily lengthy and detailed notices of adjudication which then create significant difficulties if the claim is then changed before filing. On more than one occasion, adjudication proceedings have been terminated because the claim has, during development, strayed significantly from the bounds of the notice.
While there is considerable benefit in some preparation of the claim documentation in advance, the notice is only required to “briefly” describe the dispute. In this respect, it is enough to cover the matters listed in section 28 in reasonably general terms, which provide sufficient notice of those matters – identifying the project, the dispute and the remedy sought – and leaving sufficient flexibility to define those matters in detail in the claim. Certainly, there is no place for legal argument or detailed evidence to be provided in the notice.
In most cases, the genesis of a dispute is reasonably clear. Once the positions of the parties have become established, and the dispute crystalised, there is little reason not to refer the dispute to adjudication early, and considerable benefit in doing so. With time, most disputes have a tendency to infect the wider relationships in the project, and the dispute itself can spread to other aspects of the works, making effective resolution more difficult, and achieving a successful project outcome more remote.
The reference to “speedy resolution” of disputes as one of the purposes of the Act is intentional, and often gets insufficient weight.
If the dispute is clearly defined, and the notice of dispute phrased with care to meet the requirements of the Act, then the opportunity for a durable resolution of the dispute is considerably enhanced. Such an approach also reduces the risk of the dispute infecting the rest of the project, reduces legal cost and delay, and will result in a determination which is more likely to be acceptable to both parties.
Next week I will cover selecting and appointing your adjudicator.