The Housing Grants, Construction and Regeneration Act 1996 and its effect on the Private Finance Initiative

Martin Fox gives his view

A number of commentators have expressed the view that the new fast track adjudication procedure contained within Part II of the Housing Grants Construction and Regeneration Act 1996 ("the Construction Act") will trigger claims which might otherwise have never seen the light of day. Indeed, 45% of respondents to the Cameron McKenna Construction Industry survey (see the Summer 1998 edition of the Construction Law Bulletin) thought that arbitration and/or litigation would increase in consequence.

If, then, there is to be a flood of new disputes followed by a flood of adjudicators' decisions 28 days thereafter, who is paying? What is the attitude of Insurers towards the new Act and the adjudication process? Will the "standard" indemnity policy available to consultants and contractors alike (leaving aside specific endorsements) require Insurers to indemnify their Insureds?

On 19th June, Building magazine reported the views of the Contractors Liaison Group as follows:

"Insurers are not playing ball with the legislation .... they are attempting to legitimise non-compliance with adjudication decisions".

In particular, it was reported that insurance companies are advising policy holders to challenge adjudicators' decisions once projects have finished so hindering, it was argued, the "quick fix" ethos behind the Act. The article also went on to maintain that Insurers were insisting that their Insureds contact them before complying with adjudication decisions and were requiring policy holders to clear adjudicator's appointments with their Insurers before accepting an appointment.

It is, in fact, a little surprising that an Act which came into operation so very recently (and impacts only on contracts signed from May 1st 1998) has already generated sufficient disputes to cause the Contractors Liaison Group such concern. It is suspected that the picture will become rather clearer (and less fraught from the point of view of those seeking indemnity cover in respect of adjudicators decisions) as the process beds down.

So, leaving aside specific provision for adjudication in indemnity policies that incept over coming months (a point to which I return below) will the "standard" wording, to the extent such a creature exists, cover an adjudication award?

"Standard" insuring clause

Let us assume an Insuring clause along the following lines, (this example taken from the policy considered by the Court in Cox -v- Bankside (1995) 2 LR 437) which provides indemnity:

"Against all sums which the Assured shall become legally liable to pay as damages ...... in respect of claims ..... arising from ...... any negligent act, error or omission, breach of warranty of authority or breach of trust committed or alleged to have been committed by the Assured ....."

The lead case on the obligation to indemnify is the Court of Appeal decision in Post Office -v- Norwich Union (1967) 2 QBD 3 QL in which Lord
Denning explained:

".... the Insured only acquires a right to sue [his Insurers] for the money when his liability to [the claimant] has been established so as to give rise to a right of indemnity. His liability to the [claimant] must be ascertained and determined to exist either by judgment of the Court or by award in arbitration or by agreement .....

..... the Insured can only have sued for indemnity when his liability to the third person was established and the amount of the loss ascertained".

The Post Office case was approved by the House of Lords in Bradley -v- Eagle Star (1989) AC 957.

Although little, if any, reference is made to "finality" in Lord Denning's judgment, doubts have been expressed in the professional press and elsewhere as to whether an adjudication decision would fall for indemnity under the example wording on the basis that an adjudication is not "final and binding"; the Act makes express provision for the issue to be revisited in arbitration or litigation once the contract has been concluded. An adjudicator's decision is provisional to all intents and purposes (and who does not believe that a very great number of those decisions will not be revisited once the paying party - who may well have been ambushed in the first place - is allowed out of the starting blocks?) In the light of that, will Insurers be obliged to indemnify the Insured pending a "final" resolution or must the Insured go through the hoops of arbitration or litigation to qualify for indemnity?

Weighty legal opinion lies behind those "finality doubts" referred to above. Equally weighty opinion, however, points in the opposite direction and draws an analogy with interim payment orders made under RSC Order 29 r.11 and, indeed, the judgment of a first instance court (which can be overturned by the higher courts on appeal). Why should there be any difference between an adjudication award and an interim payment award? Obviously, the Courts have not yet had the opportunity to test the issue but in Cox -v- Bankside, Phillips J. did address the interim payment point and rejected the submission that simply because an interim payment order was provisional, it did not establish the amount of the Insured's liability. He also pointed out the absurdity of the contention which, if correct, might find an Insured rendered insolvent as a result of his inability to call upon his Insurers to indemnify him against liability to comply with an interim payment order in circumstances where the interim payment order arises from errors/omissions for which he would otherwise be indemnified.

In all probability, therefore, a "standard" PI wording (and it is important to remember that each insurance contract should be considered carefully) is likely to extend to adjudicators awards and Insured consultants/contractors are likely to be able to look to their Insurers to indemnify them. But that is by no means the end of the problem.

Endorsement

Professional indemnity policies are commonly subject to annual renewal and, at renewal, Insurers are at liberty to seek to alter the basis of the contract of insurance. Many Insurers will or can be anticipated to seek to exclude cover for adjudicators' awards, possibly subject to a "buy back" whereby cover can be extended by a specific endorsement. By so doing, Insurers would provide themselves with a vehicle by which to place a number of specific conditions on the indemnity sought. Such conditions might well extend to very tight notification provisions - perhaps obliging an Insured, as a condition precedent to liability, to notify his Insurers of the fact of the commencement of the adjudication process within, say, 24 or 48 hours. Notification is, of course, absolutely essential given that the process has only 28 days from start to finish and, almost certainly, every hour within those 28 days will be required in very many of the disputes that will be referred to adjudication. In addition to notification matters, it is likely that adjudication specific claims co-operation clauses will be incorporated within those "buy back" endorsements - it may well be that a contractor or a consultant will be required to second some of his staff to the legal team appointed by Insurers for the entirety of the 28 day process. That can be anticipated to be a very onerous requirement but one which the nature of the adjudication process will render unavoidable. No doubt many brokers will be advising their clients to pay additional premium in order to obtain cover for their own costs of co-operation in this regard.

Summary

The insurance market will recognise the very significant difficulties the adjudication process is likely to create both for them and for their Insureds.

It is likely that the market will adapt to cater for those difficulties and that insurance policies available in the London market will cover adjudication awards - whether under the "standard" wordings or, more likely, under adjudication specific endorsements. The striking features of those endorsements are likely to be tight notification provisions and onerous claims co-operation clauses.

The moral of story, particularly in a soft market, is that if your current Insurer does not cover you for adjudication, another will. Shop around.