Litigation annual review 2002: Construction disputes
The taming of adjudication
The Housing Grants Construction and Regeneration Act 1996 came into force on 1st May 1998 and lists mandatory terms to be included in all construction contracts from that date. These include terms on payment and restrictions on set-off, and a provision that all construction contracts must contain a right to refer a dispute to adjudication at any time.
The adjudication procedure set out in the Act is a 28 day procedure in which an appointed adjudicator decides a dispute. The adjudicator's decision is "binding until finally determined by legal proceedings or by arbitration".
For a while lawyers discussed what this meant. Would the adjudicator's decision be enforceable in court? Was it a fair process; would the rules of natural justice apply, and what happened if the adjudicator made a wrong decision?
We were put out of our misery on 12th February 1999, with the judgment of Macob Civil Engineering v Morrison Construction Ltd. An adjudicator's decision was successfully enforced by way of summary judgment, and the court held that this was an appropriate method of enforcement. There was much rejoicing, particularly amongst sub-contractors.
It soon became clear in the months that followed Macob that the courts were taking a robust approach to statutory adjudication and were using a purposive interpretation of the Act.
Statements made in relation to adjudication by judges and commentators included "fast track procedure"; "bound to make mistakes" and "rough and ready justice". It was recognised that sometimes an unfair conclusion may result from adjudication, but that the court must nevertheless enforce decisions, as the balance could always be redressed in subsequent legal or arbitration proceedings.
It is now nearly 3 years since Macob Civil Engineering v Morrison Construction Ltd. An enormous body of case law relating to the enforcement of adjudicators' decisions has accumulated. Imaginative lawyers and clients have submitted a cornucopia of thorny questions for judicial consideration.
So has adjudication enforcement grown out of its wild youth and become a more cautious creature like arbitration or litigation, or is it still enjoying the heady days of indulgence by the courts?
The heroes of adjudication
Four months after the Macob decision, the court stated in A& D Maintenance and Construction Ltd v Pagehurst Construction Services Ltd that it did not have the power to open up and review adjudicators' decisions where adjudicators were properly appointed and had considered matters under the con-tract properly within their remit. This has become the crux of the law relating to enforcement of adjudicators' decisions.
However the big crunch came in November 1999 with the Bouygues UK Ltd v Dahl Jensen UK Ltd decision, where the court enforced an adjudicator's decision even though it acknowledged that the decision was clearly wrong. This approach was upheld by the Court of Appeal in July 2000.
In VHE Construction plc v RBSTB Trust Company Limited the court stated that if a party had any defences or cross-claims which it had not raised in the adjudication, Construction disputes The taming of adjudication then it could not rely on them in order to defeat or diminish an application for summary enforcement of the adjudicator's decision.
The next question raised by lawyers was whether Human Rights laws would apply to adjudication. The answer is no: adjudication is not a final determination of a dispute (Elanay Contracts Ltd v The Vestry), and an adjudicator is not a public body (Austin Hall Building Ltd v Buckland Securities (Scotland) Ltd). These decisions are a relief to the supporters of adjudication, as a declaration of incompatibility with the Human Rights Act 1998 would have been disastrous.
More good news came from the courts when they confirmed that an adjudicator's decision creates a debt which could form the basis of a statutory demand, and that the court cannot go behind this debt (Re a Company 2001). In the normal way, how-ever, (unlike summary judgments) the demand would of course be set aside if there were valid cross claims.
The biggest enemy of a successful recipient of an adjudicator's award is a jurisdictional challenge. These are discussed below. However, while we are considering the heroes of adjudication, it is worth mentioning 3 important decisions which narrowed the potential for jurisdictional challenges.
In Karl Construction (Scotland) Ltd v Sweeney Civil Engineering (Scotland) Ltd the question was: did the Adjudicator answer a question that was not put and therefore without jurisdiction? The Adjudicator had decided that the payment provisions of the contract were not compliant with the Act, but she had not invited submissions from the parties on the point. The court decided that provided the additional question was merely an integral part of the route to the substantial question in dispute, there was no trespass outside her jurisdiction. It was a procedural mistake within jurisdiction and therefore was binding.
The court went a bit further in LPL Electrical Services Ltd v Kershaw Mechanical Services and stated that an error of law or interpretation is not outside jurisdiction. This has just been confirmed by the Court of Appeal in C&B Scence Concept Design Ltd v Isobars Ltd (31 January 02), who stated that an error of law by an adjudicator should not prevent summary judgment of his decision.
It may seem from the above that the victim of a wrong adjudicator's decision is in a hopeless position; however this is only half the story…
The enemies of adjudication
It soon became clear that jurisdictional challenges were the most useful tool avail-able to any defendant looking at the wrong end of an adjudicator's decision. The first successful use of this defence was in Project Consultancy Group v Trustees of the Gray Trust in July 1999 and was on the basis that the Construction Act did not apply to the contract as the contract (if there was one) had been entered into before 1st May 1998.
Since then, challenges have been successfully raised on the basis that: there was no contract; the contract did not relate to "construction operations"; the adjudicator was incorrectly appointed; there was no "dispute"; the adjudicator considered the wrong question, or a question that was not put to him and so forth.
The law on errors of law has just been clarified by the Court of Appeal (see C&B v Isobars above). It now seems that an adjudicactor's error is only subject to a jurisdictional challenge if the error is deciding matters not referred to him.
In two cases the court refused to enforce the adjudicator's decision on the grounds that the parties had already reached a compromise agreement and therefore the "dispute" was not amenable to adjudication. (See Lathom v Cross).
One of the major concerns relating to the fairness of the enforcement of adjudication awards (especially incorrect ones!) has been: what if the winner of the adjudication becomes insolvent and therefore it is impossible to recover in subsequent litigation proceedings money paid out as a result of adjudication? The answer is now clear, following 3 cases (Herschel Engineering Ltd v Breen Property Ltd; Bouygues in the Court of Appeal and Rainford House v Cadogan Ltd): that where there is serious, provable doubt that a party will be unable to repay any money awarded, a stay of execution will be granted. Where a party is actually insolvent, summary judgment proceedings are not suitable as the paying party would be deprived of the opportunity to set off any cross claims they might have under the construction contract, or under the insolvency rules.
Another burning question amongst lawyers was, for a while, do the rules of natural justice which apply to litigation and arbitration (fairness, impartiality, both sides being heard etc) apply to adjudication? This was particularly relevant due to the fast-track nature of the procedure and the fears of "ambushing" defendants with claims.
Although the court has refused to condemn the timescale of adjudication as being unfair, it is now clear that the rules of natural justice do apply to adjudication. In one case (Discain Project Services v Opecprime Development Limited), the adjudicator failed to consult a party on important submissions made by the other. This failure to comply with the rules of natural justice meant that the court declined to enforce the decision. Shortly after, the court refused to enforce the decision of an adjudicator who had failed to act impartially. Then in February last year, summary judgment was not granted in a case where the adjudicator had acted as a mediator, giving rise to an arguable case of perceived bias. (Glencot v Ben Barrett).
Conclusion
The courts' refusal to open and review adjudicators' decisions, the non-application of the Human Rights Act and the difficulty of raising a cross-claim or defence show that the adjudication process is very different from litigation and arbitration.
However the courts have become a little more cautious in recent times. The need for a degree of fairness has resulted in the application of the rules of natural justice and exceptions made for insolvent claimants. Jurisdictional challenges have been successful on numerous occasions and remain the key weapon in defendants' armouries.
Rough-and-ready justice? Maybe, but the purpose of statutory adjudication is to facilitate cash flow in the industry, and, in achieving this, most would agree that it has been a success.
The other articles contained in the Litigation Review 2002 may be found on by clicking on ‘your latest information’ on our website www.law-now.com. Alternatively, to access a PDF of the complete review please click here.
For further information on this article please contact the authors Vanessa Hall by telephone on +44(0)20 7367 2670 or by e-mail at vanessa.hall@cms-cmck.com; or John Uwins by telephone on +44(0)20 7367 2502 or by e-mail at john.uwins@cms-cmck.com.
For further information on this review in general, please contact Tim Hardy on +44 (0) 20 7367 2533 or by e-mail at tim.hardy@cms-cmck.com.
