Construction disputes: global markets embrace adjudication

Out-Law Analysis | 28 Jan 2022 | 10:20 am | 12 min. read

Adjudication is increasingly the “only game in town” for most construction disputes in the UK, and its popularity in other jurisdictions is taking off.

A fast and relatively inexpensive means of dispute resolution, adjudication can help resolve interim payment disputes and keep projects moving. In the UK, 25 years after its introduction in the 1996 Construction Act, adjudication of construction disputes has earned endorsement by the UK’s Supreme Court as “a conspicuously successful addition to the range of dispute resolution mechanisms available for use in what used to be an over-adversarial, litigious environment”.

Adjudication in the UK

In the UK, the statutory right to adjudication was introduced in response to the recommendations of Sir Michael Latham in his July 1994 report, ‘Constructing the Team’. The main objective was the improvement of cashflow to fund ongoing works on construction projects. A particular concern was that disputes between supply chain members could only be resolved by litigation or arbitration and in the meantime could disrupt the entire project. The preferred approach was “pay now, argue later”.

Adjudication can help solve the cashflow problem. Disputes may be referred to an adjudicator at any time and decisions are given against rigorous time limits. Although only provisionally binding, the courts have shown a readiness to enforce them by summary judgment, leaving any continuing disagreement about the merits of the underlying dispute to be resolved later, by arbitrationlitigation or settlement agreement.

In the UK adjudication is used for much more than just interim payment disputes. There is no restriction on the type of dispute that may be referred to adjudication. Analysis, below, of over 200 recent decisions from adjudicators in cases where we acted for one of the parties shows a wide range of issues including defects, loss and expense claims and claims for extensions of time.

 Nature of dispute Number
Validity of payment application / payment notice / pay less notice 68
Defects 52
Loss and expense / prolongation / thickening / disruption 50
Extension of time 41
Liquidated damages 30
Variations / changes 30
Value of works 13
Set off 11
Contract formation / interpretation 10
Negligence / breach of professional appointment 8
Termination 8
Unclear 8
Estoppel / waiver 6
Target cost / pain-gain share 4
Breach of contract / damages 2
Insurance 2
Limitation / prescription / time bar 2
Project data 1
Suspension 1
Warranties 1

It is no wonder that, in the Court of Appeal last year, Lord Justice Coulson described adjudication as “the only game in town” for most construction disputes.

Adjudication is fast and relatively inexpensive. Although the majority of the recent decisions on our database concerned disputes which were complex and involved large sums (a total of more than £638 million was claimed), the average time for reaching a decision was just 59 days and the average adjudicator fee was under £25,000.

Many senior legal commentators were concerned 25 years ago that adjudication’s speed and economy would come at an inevitable price in terms of reliability. Although subjective, our own analysis suggests that of over 200 decisions, 92% were well reasoned.

A more reliable measure of the success of adjudication is the relatively small number of adjudicated disputes which do go on to arbitration or litigation. There are almost 2,000 adjudicator nominations each year in the UK by adjudicator nominating bodies but only a few dozen end up before the courts for enforcement. Most adjudicator decisions are accepted by the parties as being in the right ballpark. As one judge has commented: “where, as is so often the case, the parties regard the decision as a decent attempt to arrive at a fair resolution of the competing positions, the parties generally treat the decision as binding or negotiate a settlement around it”.

Concerns have been raised about the cost of adjudicating smaller disputes and these have been met by new low value dispute schemes introduced by TeCSA and CIC/RICS where adjudicators offer their services for reduced or capped fees. The training and continuing assessment of adjudicators has also come under the spotlight with many of the adjudicator nominating bodies tightening up their requirements and procedures.

The UK adjudication system can be expected to go from strength to strength. 

Adjudication in Australia

Like in the UK, adjudication has become a feature of most construction disputes in Australia, often being the first major skirmish in what can develop into long-running arbitrations and litigations. However, one major difference is that only claims for payment can be made in adjudication in Australia. For example, it is beyond an adjudicator’s power to extend time for completion under a construction contract.

Adjudication in Australia is widely used. The most recent adjudication statistics for the four largest Australian jurisdictions - New South Wales, Victoria, Queensland and Western Australia - show that about 1,000 adjudication applications are made each year. About A$1.8 billion (US$1.27bn) in claims are submitted under security of payment (SOP) legislation each year.

Between 2010 to 2015 there were many large payment disputes on liquefied natural gas (LNG) projects in Australia that were the subject of adjudication. In that period there was substantial investment in LNG in Queensland and Western Australia. Indeed, in 2020, Australia overtook Qatar as the world’s largest exporter of LNG.

Heading Tom

Tom Heading

Partner

The challenge for reform is now enacting harmonious security of payment laws to support contractor cashflow as Australia enters a further period of growth in developing infrastructure and energy projects

From about 2015 onwards we saw many more adjudications in the transport infrastructure sector given substantial government spending on those projects. We are now seeing a shift towards more adjudication activity on renewable energy projects as investment in solar and wind continues to accelerate, assisted by Australia’s abundance of solar and wind resources.

One undesirable feature of Australia’s SOP system is that there are eight different SOP acts; one for each of the country’s eight states and territories. In the early stages of adjudication in Australia, most of these acts followed the lead of New South Wales which was the first jurisdiction to pass a SOP act in 1999. However, there has been an unfortunate trend away from common SOP laws to a disjointed national regime. Most recently major legislative changes have been made in Western Australia, New South Wales and Queensland. Changes in Western Australia are particularly significant and have attracted some negative commentary. One of those controversial changes in Western Australia includes a provision that allows a decision maker such as a judge, arbitrator, expert determiner or adjudicator to declare that a time bar provision in a construction contract is “unfair”, if compliance with the provision is not reasonably possible or would be unreasonably onerous.

The push by the construction industry for harmonisation of SOP laws culminated in the publication of a government-commissioned report in 2017 prepared by John Murray AM which made 86 recommendations for reform. Few of these recommendations have been adopted, and those that have been adopted have not been consistently enacted across jurisdictions. Based on building ministers’ meeting communiques, reform in this area appears to have taken a back seat to important legislative changes around code compliant buildings and combustible cladding issues.

Political support for SOP laws is strong and backed by both major political parties. The challenge for reform is now enacting harmonious security of payment laws to support contractor cashflow as the country enters a further period of growth in developing infrastructure and energy projects.

Parties to adjudications also often find themselves in court where one party contends that the adjudicator fell into jurisdictional error and the adjudicator’s decision should be set aside. These types of applications are common, being commenced in our experience for about a quarter of major adjudications. The courts in these applications do not consider the merits of the claim for payment, but rather whether the necessary procedural steps leading to adjudication have been followed and whether the adjudicator has discharged their statutory function.

Adjudication in Singapore

Singapore also has SOP legislation originally enacted in 2005 which is similar to the Australian security of payment acts.

Changes to Singapore’s SOP legislation were made in 2019. These brought more construction contracts, such as pre-fabrication works, into the scope of the legislation, introduced a 30-month limitation period for the service of payment claims and created a right to adjudication review.

Adjudication in Ireland

Ireland is a relative newcomer to adjudication. The Construction Contracts Act 2013 came into force on 25 July 2016 and allows disputes over payment in construction contracts to be referred to adjudication in Ireland.

Davies Lawrence

Lawrence Davies

Partner

A fast and relatively inexpensive means of dispute resolution, adjudication can help resolve interim payment disputes and keep projects moving

Adjudication is still in the early stages in Ireland and will benefit from more case law. There is particular uncertainty around the extent that crossclaims, such as liquidated and ascertained damages, can be used to limit financial exposure: adjudicators in Ireland have taken different positions on the issue. 

However, in two significant decisions in 2021 the Irish courts have shown they will enforce adjudicators’ decisions unless, as in the UK, the adjudicator lacks jurisdiction or breaches the rules of natural justice. The courts have stressed, however, that the vast body of UK case law is of only limited relevance given the differences in Ireland’s legislation.

Adjudication in Canada

The landscape of SOP legislation is fragmented across Canada, with different legislation for each province and territory.

Concerns raised by industry bodies lead to federal prompt payment legislation being announced in 2018. Receiving royal assent on 21 June 2019, the Federal Prompt Payment for Construction Work Act addresses non-payment of contractors and subcontractors performing work for federal construction projects. The date of its official enactment remains undetermined but, once in force, the Act may cause some disruption in that it provides for a one-year deferral period before being applied to existing contracts.

Adjudication in Hong Kong SAR

In October 2021, the Hong Kong Special Administrative Region Development Bureau released a new technical circular setting out the implementation of SOP provisions in public works contracts for the purpose of “facilitating timely processing of contract payments and providing an interim mechanism for speedy resolution of payment disputes before the enactment of the Security of Payment Legislation (SOPL)”.

Instead of following the footsteps of UK, Australia and Singapore in enacting SOP legislation, Hong Kong SAR has ventured into uncharted territory with the circular requiring implementation of SOP provisions purely by contractual arrangement.

Adjudication in South Africa

South Africa does not yet have a statutory framework regulating adjudication as a dispute resolution mechanism. Adjudication is, however, widely adopted in the South African construction industry on major infrastructure and energy projects, through the dispute resolution clauses contained in most standard form construction contracts i.e. FIDIC, NEC and JBCC. There is no limit as to what types of dispute can be referred to adjudication, with most contracts requiring all disputes that arise under the contract to be referred to adjudication as the first step in a multi tired dispute resolution process.

The South African courts have recognised the importance of adjudication in resolving disputes on construction projects, describing it as “a measure for the summary and interim resolution of disputes, subject to their final resolution by arbitration where appropriate”. There is consistent judicial precedent confirming the binding and enforceable nature of an adjudicator's decision until such time as it is replaced by an arbitral award. Accordingly, the South African courts will only interfere in an adjudicator’s award in limited circumstances, namely a material procedural irregularity or a lack of jurisdiction on the part of the adjudicator.

As in Ireland, adjudication in South Africa is still in the early stages of its legal development and will benefit from further judicial precedent. In the absence of a statutory framework regulating the adjudication process, an issue that often arises in practice is that the parties to a dispute which requires adjudication as a first step in the dispute resolution process often mistakenly treat adjudication as a form of mini-arbitration, extending the adjudication timetables prescribed in the standard form contracts. The result is that the purpose of adjudication – to have disputes resolved expeditiously on an interim but binding basis during the course of the project – can be eroded.