UK: Adjudication – Rough Justice?

The experience of the adjudication process has been described to me by one intrepid person as batting without pads on a damp and overcast Sunday afternoon – you don't quite know what is going to happen, how long you will last, whether or not you will get hurt or quite how you will be treated by the umpire if he has left his glasses at home.

There are likely to be few organisations within the construction industry who are not now aware of adjudication. Statutory adjudication came into force on the 1st May 1998 under the Housing Grants, Construction and Regeneration Act 1996 ("the Construction Act"). For the good or the bad of it, the industry has had to adapt itself to a speedy form of dispute resolution where an adjudicator is to arrive at a decision within 28 days (which can be extended in limited circumstances). The decision is binding until such time as the dispute is finally determined by litigation, arbitration or agreement.

Following an adjudicator's decision if the losing party does not wish to pay, the Courts have done their utmost to enforce the adjudicator's decision by way of summary judgment. If the losing party should have a further argument about the merits of the adjudicator's decision then it could attempt to overturn it in either litigation or arbitration. It will have to pay over the monies awarded by the adjudicator. The adjudicator's decision is a temporary measure though nonetheless it is binding. By way of a summary:-

• The decision of an adjudicator whose validity is challenged as to its factual or legal conclusions remains a decision that is both enforceable and should be enforced.
• A decision that is erroneous, even if the error is disclosed by the reasons, will still not ordinarily be capable of being challenged and should, ordinarily, be enforced.
• A decision may be challenged on the ground that the adjudicator was not empowered by the Construction Act to make the decision, because for example there was no underlying "construction contract" between the parties and therefore he had gone outside his terms of reference.
• Adjudication is intended to be a speedy process in which mistakes will inevitably occur. The Courts have guarded against characterising a mistake in an answer to an issue, which is within an adjudicator's jurisdiction as being an excess of that jurisdiction.

Where a successful party in an adjudication is effectively insolvent and there is a serious doubt as to the ability of that party to repay the monies awarded by the adjudicator once the matter has been finally determined, then summary judgment will be stayed (Rainford House Limited (in Administrative Receivership) v Cadogan Limited). Rainford were awarded £75,000 by the adjudicator and sought to enforce the decision. Rainford was in administrative receivership. Cadogan had had to pay various sub-contractors that should have been paid by Rainford and Cadogan thus had a counterclaim of £73,000. The Judge had sympathy with Cadogan's position that in subsequent litigation to attempt to overturn the adjudicator's decision Cadogan would be fighting against an insolvent party. The purpose of the Construction Act was not to transfer between the parties the risk of insolvency.

Adjudication is quick, rough justice but the adjudicator has a duty to act impartially and to consider all relevant information submitted to him by the parties. The adjudicator is required to make a decision within 28 days of the date of the referral notice. A referring party can have spent many months preparing a claim and many responding parties find the limited time in which they are required to respond (which may require the preparation of a defence within 7 days) as unfair – the ambush tactic.

Parties have attempted to persuade the Courts that statutory adjudication breaches their Human Rights, in particular their right to a hearing which must be fair, public, within reasonable time and before an independent and impartial tribunal established by law (Article 6(1) of the Human Rights Act which came into force on 1st October 2000).

Other parties have tried to argue that there has been a breach of "natural justice".

The Courts have rejected the Human Rights arguments but will protect a party where there has been a breach of natural justice. The key question is procedural fairness. Would a fair-minded and informed observer conclude that there was a real possibility or real danger that the adjudicator was biased? Any breach must be "substantial and relevant." By way of example:-

• An adjudicator failed to consult with one of the parties on important submissions and held various telephone conversations with one party and not the other. The Court refused to enforce the decision. Applying the objective test, there was a real possibility or a real danger that that the adjudicator was biased.
• Enforcement of an adjudicator's decision was refused where the adjudicator had been present (though at the request of both parties) at a mediation negotiation between the parties. There was a real possibility that the adjudicator was no longer impartial.

The Courts use natural justice to import principles of procedural propriety into adjudication. Adjudicators who are running adjudications should do so equally and fairly and if they do deal with matters by telephone then conference call facilities should be used.

Unless both parties seek their legal costs in the adjudication proceedings then each party will have to bear its own costs. The adjudicator does have power to apportion his fees as he sees fit. These can be significant.

In most circumstances, a successful party will face having to pay its own advisors even if it is successful without being able to recover the costs from the losing party. The speed of adjudication tends to put a brake on some of the costs which would otherwise be incurred if the matter was litigated or arbitrated. In a complex case however significant costs and management time can be incurred. The costs position should be borne in mind in any negotiations in advance of adjudication.

The Courts will not interfere with a clause in a contract which requires the referring party to pay the adjudicator's cost and/or the costs of the responding party, irrespective of the outcome. According to the Constructors' Liaison Group report – June 2000, 19% of bespoke contracts examined included such a provision.

Adjudication can be effective in relation to payment disputes. It has to be recognised that some disputes by their very nature are better litigated or arbitrated (if settlement cannot be achieved through a process such as mediation). However, in the event that you receive a notice of adjudication you have no option but to participate (subject to jurisdiction arguments) or to settle. Should you be in doubt then seek advice.

The quality of the decision is dependent upon the quality of the adjudicator nominated (or stated in the contract) to decide the dispute. In the event that an adjudicator is nominated by a nominating body it is advisable for those conducting the adjudication to set out as much detail as possible and requirements for the qualifications of the adjudicator.

Parties to construction contracts should, as a matter of course:-

• Maintain all documents and records in good order as it may be necessary to defend an adjudication at short notice. Ensure that key witnesses will be available.
• Do not lose sight of contractual rights (or obligations) to receive (or lodge) claims pursuant to the contract conditions (together with appropriate supporting details).
• As with any dispute do not allow the dispute to fester and be aware of the potential of ambush. Do not waste costs and time if it is considered there is a genuine liability.
• Consider timing and the commercial situation. You may issue your adjudication notice but does your opponent have a counterclaim which he himself could refer to adjudication at any time?